Which Online Travel Company Should We Invest In?
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
These days, in order to quickly find the cheapest airfare or hotel bookings for our travel plans, we often seek help from online travel bookers such as Priceline.com (NASDAQ: PCLN), Expedia (NASDAQ: EXPE), and Orbitz Worldwide (NYSE: OWW). Interestingly, these three companies have exhibited different share price performances in the past twelve months.
Orbitz has been the best performer among the three with an appreciation of nearly 110%, while Expedia ranked second with a 43.2% increase. Priceline.com was the most disappointing stock for investors as it rose only 13.3% in the past twelve months. Let’s take a closer look at these three online travel booking companies.
Priceline.com has the highest EV multiple
Priceline.com is the owner of several websites including Booking.com, priceline.com, Agoda.com, and rentalcars.com. Most of its sales, $3.14 billion, or 59.7% of total 2012 sales, were generated from the Agency business while Merchant revenue was around $2.1 billion in 2012. Priceline.com has grown its top and bottom line consistently in the past five years. Revenue increased from $1.88 billion in 2008 to $5.26 billion in 2012 while net income rose significantly, from $193 million to $1.42 billion during the same period.
Priceline.com does not employ a lot of debt in its operations. As of March 2013, it had nearly $4 billion in equity, $5.18 billion in cash and short-term investments, and only $1.5 billion in debt. Priceline.com is also a cash cow. In 2012, it generated nearly $1.79 billion in operating cash flow and $1.73 billion in free cash flow. It is trading at around $765 per share with a total market cap of $38.1 billion. The market seems to value Priceline.com quite expensively, at as much as 17.42 times EV/EBITDA.
Indeed, Priceline.com has the highest valuation compared to both Expedia and Orbitz Worldwide. Expedia is trading at nearly $59 per share with a total market cap of $8 billion. The market values Expedia much cheaper than Priceline.com at 11.1 times EV/EBITDA.
Expedia and Orbitz – lower multiple but more leverage
Expedia reported that it has a dynamic portfolio of travel brands with the broadest supply portfolio of nearly 200,000 hotels in 200 countries and 300 airlines. Expedia has also enjoyed spectacular growth in the past five years. Revenue increased from $2.94 billion in 2008 to more than $4 billion in 2012. In 2012, Expedia generated $280 million in net income, $1.23 billion in operating cash flow, and $994 million in free cash flow.
Expedia also has a strong balance sheet. As of March 2013, it had more than $2 billion in cash and investments and nearly $1.25 billion in debt. However, Expedia uses more leverage than Priceline.com. Its debt/equity ratio is 0.6 while the debt/equity ratio of Priceline.com is 0.2. Among the three, Orbitz has the weakest balance sheet. It had only $14 million in equity, $220 million in cash, and more than $450 million in debt.
Orbitz is the only company of the trio that incurred losses. In 2012, while it generated $779 million in revenue, the net loss came in at more than $300 million. Orbitz has several global online travel brands including Orbitz, CheapTickets, the Away Network, and HotelClub. The company generated most of its revenue, $261.5 million, or 33.6% of total 2012 revenue, from its Air business, while Hotel ranked second with $225.6 million in sales. Orbitz generates most of its revenue within the U.S.
Which one should investors choose?
Now let’s evaluate the profitability, leverage ratios, and valuations of all three companies to see which stock is the best buy right now.
Among the three, Priceline.com is the most profitable company with the highest return on invested capital at 30%, while Expedia’s ROIC was only 3.1%. Priceline.com also has the strongest balance sheet with the lowest debt/equity ratio. It seems to deserve the highest EV multiple. However, compared to its potential growth, Priceline.com is the cheapest one with the lowest PEG ratio of nearly 1, while Orbitz has the highest PEG ratio of 2.9.
My Foolish take
Personally, I like Priceline.com the most as it is the most profitable online travel booker with the strongest balance sheet and the lowest PEG ratio. Investors could consider Priceline.com for the long-term.
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Anh HOANG has no position in any stocks mentioned. 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!