Which Travel Company Should You Invest In?
Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Jim Cramer gave a boost to travel stocks on his nightly show “Mad Money” earlier this week. The TV personality predicts a rally, pointing to the technicals but also the fundamentals as the cause, calling Priceline “by far his favorite.” Therefore, let’s assess some of the moves on Wednesday.
Priceline (NASDAQ: PCLN)
Priceline.com is without question the clear leader of the pack, and its recent acquisition of Kayak is gaining the company a lot of buzz, due to the mobile exposure. On Wednesday it rallied 3.28%, giving it a near 16% return for the new year.
The Kayak acquisition could open up a world of opportunity, but at this point it is yet to be seen. The company does have incredible metrics, with an operating margin of 35.16% and a return on equity of over 40%. Unlike most internet based companies, Priceline actually trades with a PEG ratio below 1.00, indicating value. However, since Priceline is the largest and the clear leader in the space, with 20% growth year-over-year, we should first compare smaller companies to fully understand Priceline’s value or lack thereof.
Expedia (NASDAQ: EXPE)
Expedia operates a business much like Priceline’s, although smaller without the large global presence. In terms of market capitalization, Priceline is four times greater than Expedia, yet is only 30% larger in operations. Both companies have near equal growth, yet Priceline boasts the more efficient business, as Expedia’s operating margins are just 13.57% and it returns only one-third as much on its equity compared to Priceline.
Priceline’s larger valuation has been rewarded moreso based on efficiency in the space. However, with Expedia’s price/sales ratio of 2.10, compared to Priceline’s over 6.0, I believe that Expedia has more room for improvement, and would make the better long-term value investment, assuming margin and global expansion.
Orbitz Worldwide (NYSE: OWW)
Orbitz has the same business model as both Expedia and Priceline, but is much smaller. Orbitz rallied 8.23% on Wednesday, adding to its market-best 156% YTD gains. The stock has been upgraded religiously throughout the year, but all of its gains have been consistent and steady.
While the company’s top-line growth is only in the mid-single digits, its value is second-to-none. The company trades with a price/sales ratio of only 0.87 and has operating margins of 7.15%. However, I do worry about its PEG ratio of 2.32, indicating that margins may not improve or that sales could fall. Overall, because of its low valuation to sales, I think it is more attractive than Priceline, but that because of Expedia’s efficiency and its room to grow, I think Expedia is still the best choice.
TripAdvisor (NASDAQ: TRIP)
TripAdvisor rallied 3.69% on Wednesday giving it a YTD gain of almost 20%. It is often compared to the companies above, however it is actually quite different. While you can plan trips on TripAdvisor, it has become almost a mix between Yelp and Expedia. The company is more known for being on the opinions side of the online travel business, making the majority of its revenue from advertisements.
The company is growing at about 20% year-over-year yet has seen four consecutive years of margin declines. Last quarter margins did expand some, but with online advertising rates continuing to fall, I am not sure that it’s sustainable. In terms of valuation, the stock trade at 9 times sales, making it very expensive. Like I said, the stock often gets compared to the three above, but is very different in nature, and is also more expensive with more questions regarding its future performance.
Throughout my book, Taking Charge With Value Investing (McGraw-Hill, 2013), I try to stress the importance of unmeasured fundamentals, one being the comparison of companies in various industries. You can often search, compare, and then find value by seeing how companies stack up side-by-side.
In the online travel space, I think Priceline is a safe investment that is cheaper than many online based companies. Yet Expedia looks to be the clear value when stacked up side-by-side, with solid growth, room for margin improvement, and a large global world to expand its business. Orbitz is cheap, with a similar business model, and TripAdvisor is expensive, with a different business model. With that said, before making your next investment, in any industry, try comparing the simple metrics of those in the space. I think you’ll be surprised at the distinction in value that you will find.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Priceline.com and TripAdvisor. The Motley Fool owns shares of Priceline.com and TripAdvisor. 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!