Are These Companies the Next Big Thing?
Andrew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My next statement shouldn’t come as a surprise to anybody. Domestic travel in the United States was hit hard by the recession. In 2008 US travelers took 654.3 million flights, 4.05% less than the previous year and in 2009 the news was even worse, with US flyers logging only 620.8 million flights. Those two years alone made the five year annual growth rate from 2007 to 2012 -0.4%. Looking forward, the news for US domestic travelers is much better. In 2012, it is expected that 669.2 million people will take to the airways resulting in a 3.29% increase from the year before. Overall the expected annual growth rate for domestic travelers over the next 5 years is 3.3%.
This increase in domestic travelers can generally be used as a positive signal that the US economy is rebounding and consumers are willing to spend more money. As consumers spend more money, and travel more frequently, there are multiple industries that are impacted, from airlines to car rentals to hotels. But one industry that could be impacted more than the others is the travel agency industry.
Travel agencies saw a big decline during the height of the recession, seeing total industry revenue fall by 4.4% in 2009 to $18 billion, and total travel agencies decreased by 4.3% to 15,404. Over this time, online travel agencies have dominated their brick and mortar counterparts, due to their low-cost, high profit competitive advantages. Over the next five years, brick and mortar travel agencies are expected to decline at a rate of 1% a year due to the competitive nature that online sites utilize. The online segment is expected to generate more sales and to continue to capture additional market share.
There are several online travel agencies that can directly benefit from a resurging US economy and a decline in the competition field. Below are a couple that could make significant gains with the current trends of this industry
Expedia (NASDAQ: EXPE)
Expedia is a leading online travel services website. Operating under nine different brands, including hotwire.com and hotels.com, Expedia owns 10.5% of the total travel agency industry market share. Aside from Carlson Wagonlit Travel, Expedia controls the largest amount of market share in this industry, thanks mostly their large brand diversification and strong advertising spend. Over the past several quarters Expedia has increased their SG&A costs by 11% from Q4 2010 to Q4 2011, and that figure is even after a 21% decrease in SG&A from Q3 2011 to Q4 2011. Even with increasing operating costs, Expedia has managed to maintain an almost 14% profit margin over the past 12 months. One of the more enticing aspects of Expedia is the 48% dividend payout ratio. As revenue and earnings are expected to grow, so could the dividend that is being granted by Expedia.
Priceline (NASDAQ: PCLN)
Priceline is neck and neck with Expedia for market share, currently holding 9.4% of the total market. They operate under two different brands, Priceline.com and Bookings.com. Priceline has seen a solid revenue increase of 45% from Q3 2011 over Q4 2012. Analysts are expecting even greater increases when Priceline releases their results later this month. One particular point of interest for Priceline is their extensive international reach. Bookings.com is one of Europe’s largest hotel booking website, operating in 60 countries and in 16 languages. This international breadth gives Priceline an enormous advantage when it comes to expanding in the global marketplace.
As the US and international economies continue with positive momentum, families, businesses and individuals will all begin to open up their wallets and start to travel again. There is tremendous growth opportunity in this industry, and both Expedia and Priceline are well positioned to prosper off of this momentum.
Motley Fool newsletter services recommend priceline.com Incorporated. The Motley Fool has no positions in the stocks mentioned above. dillarda has no positions in the stocks mentioned above. 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.