Goldman Sachs analysts Heath Terry, Maria Seredina and Mrinal Pareek published a report on December 14 on online travel stocks. Goldman Sachs expects Internet penetration and online advertisements to keep increasing. This makes the online travel industry an interesting one for portfolio diversification. Below we will discuss their top picks as well as the stocks in the industry to avoid.
Priceline (PCLN), a company that deals with the online travel business, has been given a buy rating by Goldman Sachs. Two of its businesses, namely booking.com and TravelJigsaw, give it the best financial and competitive mix in travel. North America can be seen as a growth opportunity for booking.com and Goldman Sachs believes that the existing macro concerns are already reflected in Priceline’s stock. The company’s shares are currently trading at $473.21 per share and are expected to go north of $610 by the end of 2012. It has a market capitalization of $24.45 billion and a net margin of 24.5%. Debt accounts for 17.4% of total capital and the expected EV/EBITDA of 8.8x is less than the current market average of 9.2x.
Expedia (EXPE) is the biggest online travel agent, covering more than 8% of the online travel market. Almost 58% of its revenue comes from the U.S. market although it has an expanding international business. Goldman Sachs has given the company a neutral rating. With the shift in the market toward mobile phone based services, Expedia is trying to increase growth in its top-line. Goldman Sachs says that Asia and Latin America are on Expedia’s target list as they attempt to penetrate more international markets. Currently, its stock is trading at $28.25 and is expected to reach $30 by the end of 2012. The company has a market capitalization of $7.93 billion and debt accounts for 34.6% of total capital. The company has a dividend yield of 1% and a net margin of 12.4%. EV/EBITDA expected for 2013 is 6x versus the industry average of 9.2x.
Orbitz Worldwide (OWW), a company that has invested in the online travel business, has been given a neutral rating by Goldman Sachs. Thirty-five percent of the company’s revenues come from its air segment. It accounts for 4% of the total global online travel bookings. Goldman says Orbitz has an ownership structure that is likely to continue returning capital to shareholders over the coming years. The shares of Orbitz are trading at $3.91 per share and are expected to be at $4 by the end of next year. The company has market capitalization of $0.43 billion and a net margin of 1.6%. Debt currently represents 68.8% of total capital of the company and the company’s expected EV/EBITDA of 5.5x is less than the current industry average of 9.2x.
HomeAway (AWAY) is the largest source for online vacation listings. Its vacation rentals market has over $85 billion in global bookings. With the majority of the work currently done online, Goldman Sachs sees potential of long growth in the future but has given the company a neutral rating. Goldman says that the scale of the company and its network effects are seen as a competitive advantage with current investments in property management tools and payment processing services. Currently, its shares are trading at $21.36 and are expected to reach $28 by the end of 2012. The company has market capitalization of $2.15 billion and a target EV/EBITDA of 20x, compared to the current industry average of 9.2x.
Goldman Sachs also mentions two other Internet stocks in the same report, Goldman's opinion on both stocks are as follows:
Yahoo (YHOO) has been given a sell-rating by Goldman Sachs due to a lack of mobile offering, stagnant email product and a decrease in global minutes/user by 5% year over year YTD. The company has a strategic review in progress but Goldman Sachs does not see any benefits from it for public shareholders. Currently, the stock is trading at $14.90 and is expected to go down to $14 by the end of next year. Yahoo has a large market capitalization of $19.5 billion and a net margin of 24.5%. Debt accounts for only 1% of its total capital. The company’s expected EV/EBITDA for 2013 of 4.9x is less than the industry average of 9.2x.
WebMD Health (WBMD) deals with online health information. The company helps clients connect with physicians and other healthcare professionals more easily. Goldman Sachs has given the company a neutral rating. With WebMD’s brand, content and search rankings, it has a clear competitive advantage over its rivals. Goldman says that currently, the company is facing some pressure due to cheap ad inventories of other companies. Its stock is trading at $37.01 per share and is expected to reach $40 by the end of 2012. WebMD has a market capitalization of $2.09 billion and a net margin of 11.3%. Debt constitutes 53.6% of total capital.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.