Invest in This Tourism Leader
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Tourism is an industry in transition, with online travel agents (OTAs) like Priceline (NASDAQ: PCLN), Expedia (NASDAQ: EXPE), and Orbitz (NYSE: OWW) working (and competing) with hotels, rental car companies, and airlines to book trips for travelers. Looking at the broad landscape of this market, Priceline is the clear winner - it has a substantial international presence and has posted steadily improving margins for the last decade. Expedia's margins are shrinking, and Orbitz has reported earnings in the red for the past five years. They are both laying some groundwork for turnarounds, but I don't see enough evidence to recommend them.
A great first quarter
Priceline had a blockbuster first quarter of 2013, with 36% growth in bookings and 38% growth in hotel reservations. Gross profit grew by $1.01 billion (or a 46% growth compared to first quarter 2012). For second quarter, management predicts another 30-37% growth in bookings and 15-22% growth in revenue. Priceline commands fantastic margins (operating margin was 34.4% for the trailing 12 months), has relatively little debt, and is growing EPS dramatically ($10.35 per share in 2010 grew to $27.66 for 2012). The P/E ratio is 30.8 for the trailing 12 months, with a forward P/E of 19.6, per Morningstar. It's priced a little cheaply for a growth stock, so now is a great time to get in.
Acquisitions and mobile
Priceline has not been shy about buying other companies, with the recent $1.8 billion Kayak purchase a sign of management’s relentless focus on growing market share. Rentalcars.com, booking.com, and Agoda all are successfully functioning parts of the Priceline portfolio, and all of them were acquisitions. Priceline’s management is doing a great job of expansion through purchasing in addition to the company’s natural growth. Kayak has expertise in connecting with travelers using mobile devices, which will help Priceline expand its share in the US where Priceline only controls 11% of the market. Watch for domestic expansion as a harbinger of further growth. Barring any major hiccups (contraction of market share, significant declines in margins or EPS), this is a great long-term hold.
Decent, but too US-focused
First quarter 2013 was solid for Expedia, with 24% growth in hotel revenue, driven in part by international revenue growth of 36%. Keep an eye on international bookings and revenue growth here, as Expedia is already the dominant US player and has to expand internationally to compete better with Priceline. Management is clearly aware of this - with the recent acquisition of Germany-based Trivago, Expedia is moving to compete more heavily in Europe and internationally.
Expedia is doing its share of innovation as well, with nearly 25,000 hotels opting into the new Expedia Traveler Preference Program, which allows travelers to pay for their hotel in advance or after checkout. There is some discontent among hoteliers with the program, as it shifts some additional costs onto the hotels (including credit card fees), but Expedia has argued (successfully, given enrollment numbers) that the 5% increase in average length of stay resulting from the program is worth the cost.
The P/E ratio for the trailing 12 months is 48.8, per Morningstar, but the forward P/E is a more palatable 15.7. Expedia’s operating margins have declined over the last several years, from 21.9% in 2010 to 6.6% for the trailing 12 months. This margin compression is weighing on earnings, with EPS declining from a high of $3.41 in 2011 to $1.29 for the trailing 12 months. Until this trend reverses, I would avoid Expedia.
Profitable first quarter, weaker long-term trends
Orbitz posted a great first quarter 2013, with $1.34 in EPS (as compared to -$.06 for first quarter 2012). Net revenue grew 7% compared to first quarter 2012. Management is pushing the Orbitz Rewards program, which the company anticipates will drive customer loyalty and help Orbitz build a solid base of repeat clients. Orbitz is also focusing on mobile, and it shows – over 25% of their bookings are now done through mobile devices.
Unfortunately, this great earnings report contrasts pretty sharply with the company’s historical profitability – particularly the negative EPS for the past five years. Even earnings before interest, taxes, depreciation, and amortization (EBITDA) has been positive only for two of the past five years (2010-2011), and by little enough that just adding back interest expenses ($44 million and $40 million, respectively) alone reduced earnings to almost zero. At a forward P/E of 16.7, per Morningstar, the stock is comparatively cheap – but that’s because there is a lot of built-in uncertainty. I’m a pretty conservative investor by nature, so I would stay away for now. Wait to see if management has actually turned things around or if this quarter was a fluke before jumping in.
Priceline is far and away your best bet. The company has been growing margins consistently since 2003. Expedia and Orbitz are expanding, but their income statements don't justify investment to my mind. As the global economic recovery chugs along, all three of these companies could easily be lifted with the tide, but it's far better to invest in the company that grew earnings even during the global recession of 2008-2010. That's Priceline.
Michael Douglass owns shares of Priceline.com. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com. 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!