Back in the day, everyone had a travel agent. After all, someone had to know all the right contacts to find a good deal on a flight, hotel, car rentals, attractions, and all the intricate details of putting a trip together. As technology continually changes the way the world works, travel has increasingly become a commodity, leading hotels and airlines to compete primarily on a transparent playing field. The result has been tighter margins for the establishments offering the services, but has led to a booming industry in online booking for travel arrangements. Credit Suisse forecasts the industry to grow by 15% annually through 2010 and that is on top of incredible growth over the past decade.
Orbitz Worldwide(NYSE:OWW) was the most recent online travel company to be brought public and so far the showing has been a big disappointment. The stock priced at $15 which was below the expected range and then it quickly traded lower losing 1/3 of its value within the first month of trading. Analysts criticized management for being vague on their plans to improve the financial state of the company. Their concerns stemmed from a heavy load of debt (likely to be $550m by year end) and a business that has too much of a concentration in low growth low margin divisions (domestic and airline portions). While these concerns may certainly be valid, the company is taking steps to increase their international presence, and is also hard at work diversifying their product offering to include many non airline revenue sources. With Blackstone (NYSE:BX) still owning 48.9m shares (see Blackstone article), one can be certain that management will be watched closely and replaced if not meeting growth targets.
The company has well diversified product lines although it needs to beef up the portions that deal with international and non-airfare revenues. Below is an assortment of the brands owned by Orbitz:
- Orbitz - full service online travel
- Cheap Tickets - value conscious, leisure travel
- Ebookers - full service European portal
- Hotel Club and Rates To Go - both hotel booking sites
- Corporate Travel Solutions
- Away Network - unique experiences and activities
- White Label - behind the scenes - runs portions of American and Northwest Airlines sites
Orbitz’s financials are a bit tough to analyze because of agreements the company has with other airlines. Originally, the company was formed as a joint venture between a number of major airlines and then was eventually spun off to Cendant who sold the division to Blackstone. Consequentially, Orbitz has long-term agreements to share tax benefits and other income sheet items with specific airlines. The revenue stream and accounting becomes a bit involved and since Wall Street hates uncertainty, this confusion may have a pressuring effect on the company’s multiple.
Compared to its peers Expedia (EXPE) and Priceline.com (PCLN), Orbitz is very inexpensive. Lehman Brothers expects the company to close this gap when they are able to prove ability to expand margins. If OWW traded at the same multiple as EXPE, it would be at $16.70. Now it may be unreasonable to expect this to happen immediately, but that would be a fairly large move from this point. I do think that the stock could get some quick traction from its Q3 report next month simply because expectations are set so low. Both Lehman and CSFB stated that they expect the second half of 2007 to be uneventful and that any future growth would more likely occur in 2008. That sets the bar very low and may allow the stock to rise quickly on any news that is not extremely negative.
I recently purchased a small position and will be watching closely to see if the stock can gain some traction. Since the stock appears to have such a deep value, and growth appears to be stable, I believe the position is relatively safe. Investors have the potential for large gains if the international business takes off (pardon the pun) and the company is able to drive revenues in its higher margin businesses.
Disclosure: Author has a long position in OWW