The prices of online travel search companies have jumped up as different players in the space are acquiring shares to shore up control of these firms. These developments have been great for investors who were shareholders before these purchases pushed share prices up. The question investors should ask today is whether any of the stocks in this space trade at reasonable valuations.
In this article, I will discuss Expedia (EXPE), Kayak Software (KYAK), Orbitz Worldwide (OWW), priceline.com (PCLN), and TripAdvisor (TRIP) to see if they are attractive investment candidates. I chose these five stocks because I believe they could offer the best investment opportunities for investors under the right market conditions. These are the most widely viewed travel websites on the market today.
Travel Search Company Takeovers
Liberty Interactive (LINTA) purchased $300 million in TripAdvisor shares from Barry Diller, who resigned as the Chairman of the firm. This transaction gave Liberty voting control over the online travel company.
Under the terms of the agreement, Liberty acquired 4.8 million shares at $62.50 per share from Mr. Diller and the Diller-von Furstenberg Family Foundation. Diller sold his shares at a 63% premium, as compared to Monday's closing price. He only owned 3% of total shares in the company. After the transaction, Liberty Interactive will hold 18.2 million shares in the company, and 12.8 million Class B super voting rights shares. Hence, Liberty now has 57% voting control and 22% of total equity.
As a result of the transaction, TripAdvisor's share price rose by 6.6% to $40.90 on Tuesday, December 11th, attaining its highest price level since July.
TripAdvisor currently has over 36 million members. This marks a 70 percent increase over 2011. The company is focused on expanding internationally, and is also working to add significant depth in the area of hotel reviews.According to John Tinker, an Analyst at Maxim Group, Liberty would either "believe in Trip Advisor's growth or they have a strategy to sell it." He also said that Liberty Interactive Chairman, John Malone, has a history of maintaining shareholder-friendly measures in the companies.
According to Chris Marangi, a Portfolio Manager at Gamco Investors, the transaction could also lead to another acquisition by Mr. Malone. Malone could buy Diller's stake in Expedia. He currently owns over 4.6 million shares and voting rights in Expedia. He would also be able to acquire a larger stake in TripAdvisor. Diller has spent $8 million acquiring ownership in Expedia, Hotels.com, Hotwire.com and TripAdvisor between 2003 and 2005.
Searching for Value
None of these online search stocks are cheap by price-to-earnings multiples:
Ticker | Company | P/E | P/S | P/FCF | D/E | EPS Growth Next 5 Years |
EXPE | Expedia | 23.13 | 2.07 | 8.11 | 0.53 | 14.6% |
KYAK | Kayak Software | 43.16 | 5.41 | 44.98 | 0 | 26.5% |
OWW | Orbitz Worldwide | NA | 0.34 | 3.85 | 2.57 | 10.0% |
PCLN | priceline.com | 23.16 | 6.05 | 20.2 | 0.41 | 20.3% |
TRIP | TripAdvisor | 32.05 | 8.11 | 35.26 | 0.6 | 15.1% |
The other price multiples are not very forgiving either. Expedia has a tolerable price-to-sales multiple and an attractive free cash flow multiple. Expedia recently launched its new app for Microsoft (MSFT) Windows 8. Expedia's app had been available on previously existing platforms.
Orbitz has an attractive price-to-sales ratio and an even better price-to-free cash flow multiple. Orbitz recently revamped its free app. According to Orbitz, the online travel company increased the app's speed and ease of use. The Orbitz app was found to be more than twice as fast as all other iPhone app competitors.
Market presence was investigated by checking Google (GOOG) searches for each online search portal. The following search terms were queried for monthly searches in Google Adwords:
Exact Keyword | Monthly Searches 10.09.2012 | Monthly Searches 11.30.2012 |
expedia | 7,480,000 | 7,480,000 |
hotwire | 1,220,000 | 1,220,000 |
hotels.com | 1,220,000 | 1,500,000 |
expedia.com | 673,000 | 550,000 |
hotwire.com | 201,000 | 201,000 |
Expedia Total | 10,794,000 | 10,951,000 |
tripadvisor | 4,090,000 | 4,090,000 |
trip advisor | 1,830,000 | 1,500,000 |
daodao.com | 210 | 210 |
tripadvisor.com | 60,500 | 60,500 |
Trip Advisor Total | 5,980,710 | 5,650,710 |
kayak | 4,090,000 | 4,090,000 |
kayak.com | 368,000 | 368,000 |
Kayak Total | 4,458,000 | 4,458,000 |
orbitz | 2,240,000 | 2,240,000 |
cheaptickets.com | 90,500 | 90,500 |
orbitz.com | 165,000 | 165,000 |
hotelclub.com | 4,400 | 4,400 |
away.com | 1,900 | 1,900 |
Orbitz Total | 2,501,800 | 2,501,800 |
priceline | 2,240,000 | 2,240,000 |
booking.com | 2,240,000 | 2,740,000 |
priceline.com | 246,000 | 246,000 |
Priceline Total | 4,726,000 | 5,226,000 |
These totals were then multiplied by 12 to obtain Google's monthly average searches. These numbers are virtually unchanged over the past six weeks, which suggests that the relative popularity of these sites has not changed.
This Google Keyword Tool output is only a small fraction of the hits these sites get. Instead, it is plausible that they measure the relative amount of each site's traffic. The ratio of enterprise value to annualized Google searches for each firm was calculated below:
Company | Enterprise Value ($ Millions) | Annual Google Searches (Millions) | EV Per Google Search |
Expedia | 7200 | 131.4 | $54.79 |
Kayak Software | 1380 | 53.5 | $25.80 |
Orbitz Worldwide | 528.7 | 30.0 | $17.61 |
priceline.com | 29980 | 62.7 | $478.06 |
TripAdvisor | 5260 | 67.8 | $77.57 |
Assuming a constant proportion between Google searches and pageviews from all sources, Orbitz and Kayak are more than twice as cheap as their competitors in terms of page views. TripAdvisor and Priceline.com are expensive, and Expedia is in the middle.
Conclusion
Nearly all of these stocks are trading at high valuations. Only Orbitz is reasonably priced based on its very low price-to-sales and price-to-free cash flow multiples. However, this stock should be treated as a speculative bet because of its trailing annual loss and its high leverage.
Since it is so cheap based on traditional price multiples and as a multiple of its pageviews, a tiny position in Orbitz is defensible. Do not invest a sizeable portion of your portfolio in Orbitz.
The other names in this space could see price appreciation from takeovers and buyouts. However, this is in no way inevitable. Buying firms that are cheap relative to their valuations does not require a special event to lead to excellent returns.
