Is This Online Travel Company a Good Investment?
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TripAdvisor (NASDAQ: TRIP) saw Luxor Capital Group increase its 2Q stake in the online travel company by over 100%, from 3 million shares at the end of June to 6.5 million shares, per a 13G filing at the end of September. Christian Leone founded Luxor Capital, a New York-based hedge fund, in 2002. Prior to purchase of the new shares, TripAdvisor already made up over 6% of Luxor’s 2Q 13F portfolio.
TripAdvisor operates in a more niche market than some of its competitors. TripAdvisor is a site that focuses on reviews and helps facilitate travel booking, where key competitors, such as Expedia (NASDAQ: EXPE), Orbitz Worldwide (NYSE: OWW), Priceline.com (NASDAQ: PCLN), and Kayak Software (NASDAQ: KYAK) actually handle travel bookings. Orbitz has had a tough time so far this year, down 30% year to date and missing last quarter EPS by 20%. As well, the President of the Orbitz.com segment has made a number of insider sales around $2.80 over the past few months. Of the top online travel companies, Orbitz is definitely the most undersized at a market cap below $250 million. Orbitz, with its sub-$5 stock price and low market cap has attracted little fund interest; however, Par Capital, a fund with substantial interest in the travel industry owned 24.6 million shares.
Expedia is relatively flat since the TripAdvisor spin off. Expedia is still one of the largest online travel companies and includes other businesses, Hotels.com and Hotwire. The big worry for Expedia is its large exposure to Europe, in addition to the company’s European concerns over its lack of advertising without TripAdvisor. Expedia will likely see negative margin impacts from more advertising spending and technology innovation in 2012. As well as, they’ll probably see a less diverse revenue mix and more limited growth opportunities that puts this year’s EPS growth below 10%, versus the industry average of 24%.
Priceline is the behemoth of the industry, at a market cap of over $30 billion. The company expects to grow revenues by 19% in 2012 and 15% in 2013. However, much like Expedia, Priceline has significant exposure to Europe, where over half of Priceline’s gross bookings come from international business. Priceline’s exposure has only grown with recent acquisitions of Active Hotels and Bookings B.V., which are Internet hotel reservation service providers in Europe. Due to this European pressure, Priceline saw its price target lowered $50 to $700 by S&P; the company currently trades around $600 a share.
Kayak, the new comer to the travel industry with its summer-2012 IPO, is relatively flat since its NYSE debut. Although the company missed its first EPS estimate as a public company by 8%, the company is still expected to grow next year EPS by 35%. TSCHE Bank recently reiterated its buy rating on the company, with analyst Lloyd Walmsley citing that some of the weakness experienced by other online travel companies will be much different for Kayak given the company’s limited European exposure. In its most recent quarter, Kayak derived only 19% of revenues from Europe. However, our concern for Kayak’s current stock price is that the company trades at a high P/E ratio relative to the industry, at 50x trailing earnings.
Since TripAdvisor was spun off of Expedia in late 2011, the company is up 33%, but Luxor sees more upside, as do we—see our other thoughts on whether TripAdvisor is a good buy. We also believe that Expedia needed TripAdvisor more than TripAdvisor needed Expedia—see what hedge funds think of the travel industry. Other funds have also taken notice of TripAdvisor’s growth prospects. This includes Viking Global with 9 million shares and John Griffin with 5.6 million shares. Also, Philippe Laffont took an entirely new position in 2Q that was over 4 million shares. Although TripAdvisor trades above average on a P/E basis at 25, the company’s forward P/E is 18, as the company is expected to have a positive uptrend in EPS growth over the next five years, with an expected CAGR of 15%.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool owns shares of Priceline.com and TripAdvisor. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.