Tourism is an industry in transition, with online travel agents (OTAs) like Priceline.com Inc (NASDAQ:PCLN), Expedia Inc (NASDAQ:EXPE), and Orbitz Worldwide, Inc. (NYSE:OWW) working (and competing) with hotels, rental car companies, and airlines to book trips for travelers. Looking at the broad landscape of this market, Priceline is the clear winner – it has a substantial international presence and has posted steadily improving margins for the last decade. Expedia’s margins are shrinking, and Orbitz has reported earnings in the red for the past five years. They are both laying some groundwork for turnarounds, but I don’t see enough evidence to recommend them.
A great first quarter
Priceline.com Inc (NASDAQ:PCLN) had a blockbuster first quarter of 2013, with 36% growth in bookings and 38% growth in hotel reservations. Gross profit grew by $1.01 billion (or a 46% growth compared to first quarter 2012). For second quarter, management predicts another 30-37% growth in bookings and 15-22% growth in revenue. Priceline commands fantastic margins (operating margin was 34.4% for the trailing 12 months), has relatively little debt, and is growing EPS dramatically ($10.35 per share in 2010 grew to $27.66 for 2012). The P/E ratio is 30.8 for the trailing 12 months, with a forward P/E of 19.6, per Morningstar. It’s priced a little cheaply for a growth stock, so now is a great time to get in.
Acquisitions and mobile
Priceline.com Inc (NASDAQ:PCLN) has not been shy about buying other companies, with the recent $1.8 billion Kayak purchase a sign of management’s relentless focus on growing market share. Rentalcars.com, booking.com, and Agoda all are successfully functioning parts of the Priceline portfolio, and all of them were acquisitions. Priceline’s management is doing a great job of expansion through purchasing in addition to the company’s natural growth. Kayak has expertise in connecting with travelers using mobile devices, which will help Priceline expand its share in the US where Priceline only controls 11% of the market. Watch for domestic expansion as a harbinger of further growth. Barring any major hiccups (contraction of market share, significant declines in margins or EPS), this is a great long-term hold.
Decent, but too US-focused
First quarter 2013 was solid for Expedia Inc (NASDAQ:EXPE), with 24% growth in hotel revenue, driven in part by international revenue growth of 36%. Keep an eye on international bookings and revenue growth here, as Expedia is already the dominant US player and has to expand internationally to compete better with Priceline.com Inc (NASDAQ:PCLN). Management is clearly aware of this – with the recent acquisition of Germany-based Trivago, Expedia is moving to compete more heavily in Europe and internationally.
Expedia Inc (NASDAQ:EXPE) is doing its share of innovation as well, with nearly 25,000 hotels opting into the new Expedia Traveler Preference Program, which allows travelers to pay for their hotel in advance or after checkout. There is some discontent among hoteliers with the program, as it shifts some additional costs onto the hotels (including credit card fees), but Expedia has argued(successfully, given enrollment numbers) that the 5% increase in average length of stay resulting from the program is worth the cost.
The P/E ratio for the trailing 12 months is 48.8, per Morningstar, but the forward P/E is a more palatable 15.7. Expedia Inc (NASDAQ:EXPE)’s operating margins have declined over the last several years, from 21.9% in 2010 to 6.6% for the trailing 12 months. This margin compression is weighing on earnings, with EPS declining from a high of $3.41 in 2011 to $1.29 for the trailing 12 months. Until this trend reverses, I would avoid Expedia.