by Susan J. Aluise | May 9, 2014 8:38 am
As the U.S. thaws out from one of the most brutal winters in recent memory, demand for summer vacation trips is rising — and that bodes well for the right travel stocks.
Namely, popular online travel booking companies.
The white-hot competition in the online travel market is putting pressure on all players to grow their business to achieve market share and economies of scale. For example, Tripadvisor (TRIP) is seeking growth through acquisitions, having purchased London-based Tripbod on Monday and Vacation Home Rentals on May 1.
And there’s good reason for all online travel stocks to keep playing hard. According to a new American Express survey of nearly 300 travel counselors, 45% said their summer travel bookings, relative to their bookings from last year, have increased — despite the fact that 67% said the cost of travel is up when compared to 2013. “After one of the coldest and snowiest winters on record, it’s no surprise people are itching to get away this summer,” says Laura Fink, vice president of American Express Travel.
Those results are consistent with a new Orbitz Worldwide (OWW) survey that found a whopping 88% of Americans plan to take a summer vacation this year, up 11% year-over-year — with more than half of travelers using reward points to book hotel and airfare.
A rising tide of vacationing consumers definitely should have you pointed toward travel stocks … though some are better bets than others. So, here are two travel stocks to book and two to bump:
Conventional wisdom suggests that a stock that has gained 64% in the past year is probably well settled in overbought territory. Priceline’s (PCLN) price-to-earnings ratio of 1.2 and its forward P/E of 18.5 might suggest the same thing.
Still, PCLN still might be more right-priced than not, especially after Thursday’s post-earnings slip. Priceline beat earnings and revenue expectations for the quarter, but outlook came in light, prompting the sell-off. Still, gross booking surged by 34.2% year-over-year, which was well better than expectations.
PCLN remains a growth play in a sector that has seen solid demand growth over the past three quarters, driven by two key factors.
TravelZoo (TZOO) is in many ways a polar opposite of Priceline — a small, hungry fish in a huge pond that has struggled to keep up with bigger rivals.
And while size isn’t everything when it comes to travel stocks, being the smallest kid on the block boosts the odds of getting badly roughed up by the market when headwinds arise, as they have during the past month. TZOO shares have lost 23% since April 2, and are down a total 33% over the past year.
Chalk up those recent losses to an earnings and revenue miss last month.
The keys to a turnaround for TZOO stock are supposed to be a reboot on its business model, the rollout of its new hotel booking platform and a heavier focus on mobile, but the headwinds might be too strong to overcome quickly. TravelZoo is ditching its convoluted voucher program in favor of the new, user-friendly hotel booking platform. To pay for the new initiative, TZOO cut its search and local deals spending — and revenue generated from those sources is down by 20%-25%.
We’ll know in the second half of the year whether the new booking platform generates strong revenue growth, but I don’t expect to see a quick turnaround. Mobile apps are not a differentiator, so TZOO will have to get creative to drive growth.
Travelzoo’s valuations (P/E 15.2, PEG 0.91) indicate at least fair if not undervaluing, but the jury is still out on whether its new platform can drive success in such a hotly competitive and commoditized travel market. So I’d bump TZOO for now.
Among travel stocks, it makes a lot of sense to go big or go home – and that’s one reason why Expedia (EXPE) and rival PCLN are attractive right now.
Expedia recently beat the Street with earnings of 16 cents a share on $1.2 billion in revenue. One key to success: Expedia’s marketing partnership it inked with Travelocity last year. In the cut-throat online travel market, “co-opetition” has been a win-win for EXPE and Travelocity in the U.S. and Canada.
EXPE’s revenue for the most recent quarter rose 19% and its gross hotel bookings jumped by 29%. Solid performance from its domestic business has helped EXPE stock gain about 25% over the past year, but the company also is redoubling its efforts in international travel markets, particularly Asia. That’s key to EXPE’s growth given that international sales account for nearly half of its revenue.
With the rollout of its new Expedia Travel Preference (ETP) program which offers greater flexibility in booking and payment, Expedia is taking aim at rival Priceline’s agency model.
EXPE stock also looks good at the periphery. It has a forward P/E of 16 and a PEG ratio of 1.2, so valuation isn’t bad at all. It also has repurchased 2 million shares in the past year, and it pays a small dividend (0.8%) yield — nothing to write home about, but does speak to the company’s stability.
If EXPE stays the course in achieving economies of scale through partnerships like the Travelocity agreement — and continues to deliver shareholder value with stock repurchases and dividends — Expedia could be poised to keep soaring into 2015.
It’s no surprise that Orbitz Worldwide (OWW) has been on the schneid this week in the wake of Monday’s Q1 earnings miss. OWW reported a loss of $5.9 million (5 cents a share) on $210.3 million in revenue; analysts had expected a loss of 2 cents a share on a top line of $205.5 million. While the company attributed the loss to a tax adjustment, the results still were a far cry from the same quarter in 2012, when OWW earned $1.34 a share on $202.9 million in revenue.
One notable opportunity, however: OWW acquired the assets of Travelocity Partner Network in February and is integrating those assets into its existing partner network.
Orbitz shares are up about 15% over the past year, but although OWW’s forward P/E of 14.2 looks comparatively attractive, its PEG ratio of 3.4 is the highest among major online travel stocks and suggests it might be overvalued. It doesn’t help matters that Goldman Sachs analyst Health Terry downgraded OWW stock to a “sell” in March, noting that “Orbitz has an incrementally higher risk profile due to slowing growth as it annualizes its white-label agreement with American Express (AXP), the expiration of its exclusive Kayak relationship, and contra revenue growth from its new loyalty program.”
Two other concerns: At a time when competitors like Priceline and Expedia are growing bookings in the 20% range, OWW reported only 3% growth in the first quarter. Second, while OWW’s acquisition of the Travelocity Partner Network assets eventually will strengthen its competitive position, costs associated with integrating TPN into its existing system could be a drain on earnings for the balance of 2014.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.
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