What Do Hedge Funds Think of the Travel Industry?

Paul Reeder and Edward Shapiro of Par Capital Management had over 25% of their firm’s second quarter 13F invested in the online travel booking industry. Par Capital is a Boston-based private investment partnership that focuses mainly on travel and online media industries, and manages over $2.5 billion in assets.

Priceline.com Inc (NASDAQ:PCLN) was Par Capital’s top 2Q 13F holding, although the firm did downsize its position by 47% in the quarter. Priceline made up 11.5% of Par Capital’s 2Q 13F portfolio. Priceline is expected to increase its 2011 revenues by 19% in 2012 and 15% in 2013, reflecting anticipated market share gains and healthy volumes. It’s worth mentioning, though, that these positives are offset somewhat by economic uncertainties across the pond.

For the most part, however, international operations are expected to continue to drive growth. Over half of Priceline’s gross bookings come from abroad, fueled by past acquisitions of Active Hotels and Bookings B.V., providers of Internet hotel reservation services in Europe. This has enabled Priceline to become an overseas leader in online hotel reservations. Priceline fell off a cliff in August on earnings guidance, but has since rebounded over 10%, and still trades at a forward P/E of 17 versus its trailing P/E of 25.

LONE PINE CAPITAL

At the end of the second quarter Stephen Mandel of Lone Pine Capital held the most shares of any of the funds we track at over 1.1 million total. Priceline was also one of Lone Pine’s top five picks, while Conatus Capital also had Priceline as top five pick. Other top firms upping their shares or taking new stakes in Priceline were Tiger Global Management and Fisher Asset Management.

Expedia Inc (NASDAQ:EXPE) is expected to increase revenues 5% by the end 2012, though most estimates don’t accurately account for its December 2011 spin off of Tripadvisor Inc (NASDAQ:TRIP). Without Tripadvisor, the company will be negatively impacted by a reduced revenue mix and overexposure to Europe. As well, the company will have to increase advertising spending without Tripadvisor, though it does have the likes of its sister company Hotels.com, to use as leverage.

Expedia made up over 6% of Par Capital’s 13F portfolio; however JAT Capital Management owned over 1 million shares more than Par Capita. As well, Expedia was a new position for JAT and made up over 9% of their portfolio according to their 13F. It also appears that traders are bullish on Expedia based on options action. Par Capital had over 4.5% of its 13F invested in Tripadvisor, at around 3 million shares.

Orbitz Worldwide, Inc. (NYSE:OWW) announced an EPS of $0.04 for the second quarter, missing consensus estimates by one cent. Orbitz’s revenue was down 0.4% compared to the same quarter last year. Analysts expect that the company will post $0.17 EPS for the current fiscal year. At the end of 2Q, Par Capital was the most bullish fund in Orbitz, owning almost 25 million shares—almost 25% of Orbitz’s common stock outstanding. Other key managers owning Orbitz at the end of June were D.E. Shaw, Joel Greenblatt, Jim Simons and Steven Cohen.

The other big name in the online travel industry is Kayak Software Corp (NASDAQ:KYAK). The company made its public debut in July of this year with a stellar IPO; its shares are up almost 12% since. Kayak reported generally better second quarter results than most of its competitors, primarily due to its limited exposure to Europe (around 20%).

The P/E and P/S ratios for Par Capital’s other three holdings shows that Expedia currently trades at the greatest discount amongst the travel service companies—at 21x earnings and 1.9x sales—while Tripadvisor trades a P/E of 26x and a P/S of 6.9x. Priceline is similarly valued, at a P/E of 26x and a P/S of 6.4x. While Kayak trades at an outsized P/E of 52, its P/S ratio comes in below Tripadvisor and Priceline at 5.1. In terms of market share, Expedia has a decent hold on the U.S. travel website market, with Priceline and Orbitz battling for second. Despite being down significantly year to date, Orbitz appears to have many headwinds on the horizon, and is more attractively valued than the majority of its peers.

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