Priceline Deserves a Second Look
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When the economy goes south travel is one of the first things to suffer. Paying rent and the food bill is more important than that vacation to Disneyland. As the below chart shows, the broad based U-6 unemployment rate which includes under-employed workers is still at elevated levels. Also, disposable personal income has not kept up with population growth. These factors together with high oil prices will continue to put pressure on the travel sector. Investors need to be cautious when investing in travel companies, but as the economy improves Priceline is worth a second look.
|Ticker||Forward P/E Ratio [2013 Estimates]|
Priceline.com (NASDAQ: PCLN) is a major player in the online travel industry and recently bought out Kayak. A low total debt to equity ratio of .39, a high EBIT margin of 34.7%, and profit margin of 26.8% makes Priceline the clear leader among online travel aggregators. Travel aggregators still face tough competition from the direct sellers of flights, hotels, and rental cars. Southwest is famous for selling directly and not through travel agents. The latest recession is unique in that it was not a one or two year blip but a long drawn-out process. As unemployment and underemployment keep moving downward people will have more money to travel. Priceline is a great position to take advantage of this situation with their strong margins. Based on expected 2013 earnings Priceline currently trades at a P/E ratio of 17.6 which is reasonable for a growing online company with real revenue and earnings.
EXPEDIA (NASDAQ: EXPE) is similar to Priceline, but its EBIT margin of 8.2%, profit margin of 9.8%, ROA of 4.6%, and ROI of 9.6% make it a second class citizen. Even though its numbers are not as strong as Priceline, Expedia has a higher forward P/E ratio of 18.7. Expedia recently bought Via Travel and 2011 they spun off Trip Advisor. In the competitive travel market low margins can be a real crutch as downturns in the overall economy are felt much more strongly. Priceline is a better run company and as the economy continues to improve Expedia is best ignored until its valuation comes down.
Orbitz Worldwide (NYSE: OWW) does not look too bright with a high total debt to equity ratio of 2.57 and negative EPS in 2009, 2010, and 2011. This firm is the cheapest company of the group with a forward P/E ratio of 10.2, but the low 5 year revenue growth of 2.9% calls into question its future growth prospects. As the economy improves Orbitz is a good company to watch for a takeover. Orbitz has followed the consumer into mobile with its various brand,s but the company's large debt load and low earnings continue to weigh it down.
Travelzoo (NASDAQ: TZOO) started off with email newsletters but with fly.com they have entered into the travel aggregator space. Their email newsletters sell a number of discounted deals and vacation packages and have very low barriers to entry. Starting an email newsletter, grabbing vacation deals, and placing some ads on Google is not very expensive. Travelzoo trades at a reasonable forward P/E ratio of 15.3 and they have a healthy EBIT margin of 19.9% and a profit margin of 14.0%. Unlike Oritz, Travelzoo has posted strong 5 year revenue growth of 15.1%. The company's focus on discounts and deals has served them well during the great recession, but as the economy starts to improve they should grow along with the nation's disposable income. Even though Travelzoo looks strong, its low barriers to entry and PCLN's stronger margins make Priceline a stronger investment.
The U.S. is still recovering from the great recession of 2008 and consumers' budgets are still constrained. As unemployment and under-employment continue to decrease people will have more money to spend on vacations and the strongest online travel companies will reap the benefits. Priceline has the strongest margins and a reasonable debt load. The company is not trading at fire sale prices, but it is still a market leader which is trading a reasonable forward P/E ratio of 17.6.
MrCanadian1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Priceline.com. Motley Fool newsletter services recommend Priceline.com and Travelzoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!