Moment of Truth for Travel Stocks
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Priceline’s (NASDAQ: PCLN) Q2 earnings release has initiated the bulls vs. bears war of the quarter. Unlike the Android vs. iOS war, this one is critical. In the former you find a sizable proportion of opposition on both sides that somewhat neutralize each other, while in the latter one side of the opposition (bulls) is so heavy on the other side (bears) that it almost owns it.
The outweighing bullish trading is what led the stock to double in just two years. But the earnings release on Wednesday saw the stock plunging by as much as $100 and later more. The stock volume trades that day beat the highest trading volume for Priceline in two years. Some bizarre selling activity that was!
So what exactly happened? Priceline did beat earnings forecast by $0.48 with an EPS of $7.85. It missed revenues by a small margin of $1M, reporting $1.36B in revenues which are still up 20% from last year. Their hotel room night bookings are up 39% from last year. Their rental car days grew by 29% over the year. GAAP diluted EPS was $6.88 compared to $5.02 in the same period a year ago. The problem clearly isn’t this quarter. In fact Priceline did way better than other industry players like Orbitz (NYSE: OWW) that missed both earnings and revenue forecasts.
The problem is the next quarter. Priceline announced an earnings guidance of $11.10-$12.10 for Q3, while analysts’ consensus for next quarter EPS was around $12.82. Priceline’s conservative management based this guidance on an assumption that “economic conditions in Europe will further deteriorate.” The parent Priceline Group owns its namesake website priceline.com (US based) and three others—booking.com (the largest OTA website in Europe), agoda.com (Asian hotel bookings) and rentalcars.com (European and Asia car rentals). Priceline draws 60% of its revenues from Europe alone, which is why the Europe assumption is so relevant. And not just Priceline but some other peers also cite it as one of the reasons why they couldn’t meet expectations in the latest quarter.
TripAdvisor (NASDAQ: TRIP), which was spun off from Expedia (NASDAQ: EXPE) a few months ago, missed revenues. TravelZoo (NASDAQ: TZOO) also missed revenue forecasts but, like Priceline, met earnings. Expedia was the only noteworthy industry player that beat both earnings and revenue forecasts. Nonetheless, all travel stocks lost to the market the week following Priceline’s earnings announcement. Amid market uncertainty, beers are suggesting that good times might be over for all travel stocks alike. I’m not going to take any sides. Rather, I'm going to examine the industry under a neutral lens.
Firstly, despite the economic woes in Europe and rising unemployment in the US, traveling trends went nowhere but up. According to the US Office of Travel and Tourism Industries, the number of monthly travelers from US to overseas was greater this year compared to the same period last year (so far data is available for first four months only).
According to a survey, 58% of all travelers use travel websites to plan their vacation. Of these 58%, 45% use reservation sites—the likes of Priceline and Expedia. About 26% of the 58% use travel review sites like TripAdvisor. Though such surveys are not without limitations, if monthly travelers are up, it is obvious that so should the travel website users be. Additionally, more and more people are trending towards online travel agencies than traditional physically located agents.
Secondly, understanding the economics of the online travel industry is important before one goes on a judging spree tagging the whole industry as 'unstable' or a 'trap.' Consider the following points and ponder.
#1. Demand Elasticity
Traveling is a luxury. With hiking fuel prices and air fares, everybody cannot afford it. And let’s face it--Priceline is not Wal-Mart. It’s not a place where you buy your everyday grocery (necessities). High traveling/tourism costs mean changes of plans or at least of destination. Mostly vacations are taken once a year (business travels don’t count since in such cases it’s your company that arranges your travel and stay). Elastic demand for travel makes price setting very competitive, thus shrinking profit margins for industry players.
#2. Cyclicality
Unlike most pharma stocks that are defensive to business cycle fluctuations and growth stocks like Apple that continue to grow even through recessionary periods, travel stocks are cyclical. Demand for travel will be created only when the demanders can afford discretionary spending on vacations. During a busted economy, high unemployment and a market downturn, most sane people would like to stay at home to avoid exhausting their savings.
#3. Seasonality
Demand for travel is also seasonal. Vacations are usually taken in summers. One can easily verify this from the monthly travelers graph I shared above. The outflux is highest during June-July. The second largest outflux is in December--again during the Christmas season. Seasonal demand gives these travel websites peaking business for two quarters and weak demand for the rest of the two. Priceline’s conservative guidance for the next quarter incorporates this factor as well.
#4. Product Life Cycle
Travel websites that entered the introduction phase in early 2000s and continued in growth phase up until this year are now fast approaching the peak of the PLC—the stage of maturity. This is where enough competition has entered the industry to share the industry profits. Count in latest IPO-ed entrant, Kayak (NASDAQ: KYAK) and newly spun-off TripAdvisor. The size of the pie is the same, only now everybody gets a smaller slice out of it. Profits to individual companies fall.
#5. Macro Environment
The euro zone crisis has hit Priceline hard. The US dollar is steadily gaining strength. Unfavorable foreign currency translations continue to mar the company with blows and bruises. Priceline's international operations contributed revenues in the 2nd quarter of $859 million, a 40% increase from the previous year, but when you ignore foreign currency translations, the increase will be approximately 53%. Makes a whole lot of difference!
What does the Fed’s next QE mean to Priceline and others?
If the Fed decides to go for another round of QE, interest rates will fall, which will ultimately depreciate the dollar against foreign currencies. A weaker greenback will likely help the likes of Priceline to report better revenues and earnings in the quarters following the easing. Monetary easing in general also helps the markets in the short run (even if the economy suffers in the long run).
In a nutshell
Whether Priceline will recover from the fall and regain its lost glory is a separate debate. Understanding this industry and each player's business structure is the point in question. Demonizing the whole industry based on one (or two) troubled quarter(s) is outright foolish (with a small 'f', of course).
PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Priceline.com and TripAdvisor. Motley Fool newsletter services recommend Priceline.com, Travelzoo, 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.
