The market is set up for fuel prices to relax from their highs. This is good news for travel-related stocks. We will review online travel search as a business model and consider which of these stocks is most attractive.
Clicks Vs. Bricks
Hotels and airline companies compete against their peers on price. Online search companies compete against each other based on the attractiveness of their platforms. The platform with the most vendors and traffic provides the best environment for search. Online search sites do not compete for vendors, banner ads, or users primarily based on the prices they charge participants. Hotel and airline vendors are more concerned about making sure their prices are seen and purchased by a large number of potential consumers.
In addition to sidestepping head-on price competition, the online search business model requires less capital expenditure. This is great news for investors, who should vehemently hate cash outflows. Since this newer business model is more attractive, investors should be willing to pay higher valuations for online search stocks.
The Case for Travel Stocks: Oil Price Decline and Economic Recovery
Gas prices might be at their 2012 peak in the U.S., but according to analyst estimates they could drop to their yearly lows by the end of 2012. This price drop would rest on dormant oil refineries starting production again. The onset of winter will also decrease miles driven, leading to lower demand.
Prices at oil service stations could fall by as much as 6.3% per gallon, which translates to a final price of about $3.54. This is a trend observed by Bloomberg in its report, which compiles seasonal data from the last eight years. At this time, Europe will be delivering more gasoline to the U.S., with volume going by as much as 35% higher.
The third quarter should have shown a drop in gasoline prices at the pump, but instead Virgin Islands and U.S. East Coast refineries were getting shut down, which also lowered the supply. This led to an increase in oil prices at the pump, with gas nearly at $4 to the gallon.
The economic recovery in the United States coupled with lower price trends for crude oil creates a great environment for travel-related stocks. More spending and lower fuel prices means more vacations, more remote conferences, and more traveling. Crude oil price weakness is a good sign for stocks in the hotel and airline industries. Similarly, it can benefit online travel booking stocks. Individual stocks from these industries were considered for their value propositions.
Confirmation: Hotel Revival
U.S. hotel chain Marriott International (MAR) is thriving: it reported earnings above estimates. Net income for Marriott was at 44 cents per share, or a total of $143 million. This beats the estimates given by analysts, according to a survey by Bloomberg. Revenues for the third-quarter were also high, going up to $2.73 billion from just $2.52 billion.
Searching for Value
None of these online search stocks are cheap by price-to-book multiples:
The other price multiples are not very forgiving either. Expedia is reasonably priced, with a tolerable price-to-sales multiple and an attractive free cash flow multiple. Orbitz has an attractive price-to-sales ratio.
We can also validate market presence by checking Google searches for each online search portal. The following exact search terms were queried for monthly searches in Google Adwords:
Trip Advisor Total
These totals were then multiplied by 12 to annualize Google's monthly average searches. These numbers are not even close to the hits these sites get. Instead, they are a measure to gauge the relative amount of search traffic each site gets. For example, if Google search-derived traffic accounted for 10% of page views, I would expect Priceline.com to have almost double the page views of Orbitz based on the ratio of their Google searches.
Finally, enterprise value for each company was divided by the number of annual Google searches:
Enterprise Value ($ Millions)
Annual Google Searches (Millions)
Monthly Cost Per Google Search
Assuming that there is a ratio relationship between Google searches and total page views, Orbitz and Kayak are twice as cheap in terms of page views. Priceline.com and TripAdvisor are overpriced, and Expedia is in the middle.
Expedia is, among the names examined here, the most reasonably priced online search company on the basis of its price-to-earnings ratio and price-to-free cash flow ratio. It is also not extremely overpriced based on its price-to-sales ratio. It is also valued in the middle of its peers in terms of page views, as estimated by Google searches.
Orbitz appears to be a speculative bet in this industry based on its high leverage. A tiny position in this company might be appropriate, given its low price-to-sales multiple and its lowest estimated valuation per page view.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.