Is This Chinese Travel Company the Best in the Space?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited. (NASDAQ: CTRP) is essentially the Expedia of China, a region of the globe that is growing rapidly in tourism. On Thursday, the stock rallied 20% after a strong quarterly report. Yet, after this report, is Ctrip a better investment opportunity than American companies Expedia (NASDAQ: EXPE) or Priceline (NASDAQ: PCLN)?

Quarter at a Glance

For the second quarter in a row, Ctrip is soaring after analysts were unable to gauge the company’s year-over-year growth. For the last several months, analysts have feared that price pressure could weigh on margins. However, the company’s 28% year-over-year revenue growth more than satisfied these concerns.

Moreover, the company’s operating margin actually rose from 14% in Q1 to 16% in this most recent quarter. As a result, the company looks to be clicking on all cylinders, giving guidance above expectations, but is Ctrip the best investment in the space?

While Ctrip operates primarily in China, Expedia operates its traveling site in 25 countries, and Priceline operates in an industry-best 180 countries. Europe and North America remain the top markets for both Expedia and Priceline, but China’s population is larger than these two continents combined. Therefore, don’t let Ctrip’s loyalty to China fool you; China is a massive, fast-growing market.

How Does it Compare?

Essentially, we are looking at three very similar business models, those that gain revenue from hotel and flight bookings, and are growing rapidly on mobile. Therefore, to determine which is best, we must look at valuation and metrics.

<table> <thead> <tr><th> </th><th> <p><strong>Ctrip</strong></p> </th><th> <p><strong>Priceline</strong></p> </th><th> <p><strong>Expedia</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Market Cap</p> </td> <td> <p>$5.6 billion</p> </td> <td> <p>$45.3 billion</p> </td> <td> <p>$6.4 billion</p> </td> </tr> <tr> <td> <p>Forward P/E Ratio</p> </td> <td> <p>44</p> </td> <td> <p>19.3</p> </td> <td> <p>12.9</p> </td> </tr> <tr> <td> <p>Price/Sales</p> </td> <td> <p>6.75</p> </td> <td> <p>7.9</p> </td> <td> <p>1.46</p> </td> </tr> <tr> <td> <p>Expected 2013 Sales Growth</p> </td> <td> <p>23%</p> </td> <td> <p>21%</p> </td> <td> <p>17%</p> </td> </tr> <tr> <td> <p>Operating Margin</p> </td> <td> <p>14.50%</p> </td> <td> <p>34.6%</p> </td> <td> <p>9%</p> </td> </tr> <tr> <td> <p>Return on Equity</p> </td> <td> <p>8.5%</p> </td> <td> <p>42.7%</p> </td> <td> <p>5.2%</p> </td> </tr> </tbody> </table>

Looking at the valuation metrics, Expedia is clearly the cheapest of the three stocks. Expedia trades at a cheaper price to future earnings and price/sales ratios. However, Expedia also just missed earnings expectations, and is coming off a 20%+ intraday loss last week. Although, its discount to Priceline and Ctrip is quite extreme.

Next, Ctrip is clearly the fastest growing, but not by much. All of these companies are growing quickly. Therefore, market share and the rate of industry growth has to become a concern. Currently, the global industry is believed to be worth $24 billion. Thus, none of these companies are anywhere close to reaching a peak market outlook in sales. Therefore, I expect each of these companies to produce continued revenue growth for several years.

The one stat that immediately jumped out to me was Priceline’s 7.9 times sales premium. At first glance, this looks very expensive. However, Priceline has industry best margins, and has realized this return by making good investments (return on equity). Priceline has become one of the safer stocks in the space, as management always executes efficiently, and grows responsibly without taking too many risks. Due to Priceline’s efficiency, the company is likely worth a premium compared to Ctrip and Expedia.

So Which Is Best, if Any?

Each company has its strengths and weaknesses: Priceline is most efficient, Ctrip is growing the fastest, and Expedia is the cheapest. However, as I look at the total package, and the current opportunities, I think Expedia presents the greatest investment value.

Expedia’s margins fell significantly last quarter, but if the company can make better investments, its margins could expand. Priceline worries me because I don’t see how margins could expand any more, and much of the company’s valuation is tied to high margins. Ctrip does look to be a great company, but also, its low return on equity suggests that margins have peaked, and the company is not cheap relative to earnings.

Therefore, after comparing the space, which is one of the most important steps in finding value, Expedia is left as the best investment in the space. The company continues to grow revenue, has the most room to improve, and has the lowest risk due to its valuation. With growth opportunities being robust, I think Expedia is more than just the best in this space, but also a good overall investment. 

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