However, it’s important to remember that free cash flow is still one step removed from shareholders; management still has to allocate the capital efficiently. So far, Priceline seems content to let it pile up on its balance sheet while doing some small share repurchases here and there. Expedia Inc (NASDAQ:EXPE) also has a growing cash pile, but it returns more to shareholders in dividends and buybacks. Orbitz neither pays a dividend nor repurchases its stock, but it could be headed for oblivion so we won’t hold that against them.
Priceline.com Inc (NASDAQ:PCLN) and Expedia Inc (NASDAQ:EXPE) are both in a position to lead the online travel bookings industry over the next few years. Of the two, Expedia is much cheaper on a price-to-free cash flow basis. Expedia also trades at a similar free cash flow multiple as Orbitz, but is in a much better competitive position. Therefore, Expedia is the most attractive investment option of the three.
However, long-term investors should be aware that the industry’s lack of competitive advantages mean that margins will plummet once the global market is fully saturated. In other words, companies in this industry will be hot until they’re not.
The article Online Travel: Hot Until It’s Not originally appeared on Fool.com and is written by Ted Cooper.
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