The various online travel agencies (OTA’s) have seen huge stock price gains over the last year and a half. The stock gains were led by Orbitz Worldwide (NYSE:OWW) with a gain of 165.93% in 2013 while Tripadvisor (NASDAQ:TRIP) has been the leading gainer in the Last Twelve Months (LTM) with a gain of 96%. The chart below displays the stock price gains of the OTA's for 2013 and also the Last Twelve Months (LTM)
The movement of these stocks over the last one week ending on Mar 14, 2014 has been in stark contrast to the earlier gains, sowing seeds of doubt in investors’ minds about the future potential of these stocks. Four of the five stocks have seen stock price declines of close to 5% or more in the last one week, with Expedia being the lone gainer with gains of 0.77%. Looking at the latest correction which is underway in the markets, it would be interesting and compelling to look into the fundamentals of these companies and evaluate their investment attractiveness.
Revenue Comparative Of OTA Stocks
The three year performance of the companies should provide a fair indication of the future potential from each of these OTA’s. Therefore before we move on to the valuation, let’s look at the performance of these OTA’s over the last three years. The chart below displays the Y/Y growth in revenues at each of the five OTA’s namely: Priceline (NASDAQ:PCLN), Expedia (NASDAQ:EXPE), Orbitz Worldwide, Tripadvisor and HomeAway (NASDAQ:AWAY).
Revenue Growth Comparison Of PCLN, EXPE, TRIP,OWW, AWAY
It is clear from the above chart that priceline.com has outgrown its peers by a fair margin over the last three years. A look at the 3 year CAGR (Compounded annual growth rate) makes clear the winner from the OTA’s.
|Company||3 Year CAGR|
Priceline leads the pack, closely followed by HomeAway and Tripadvisor. Considering that Priceline revenues tower over Tripadvisor’s and HomeAway’s by 7 and 19 times respectively, Priceline’s current growth rate assumes greater significance. Expedia, the nearest competitor to Priceline by revenue, was clearly outpaced by Priceline in terms of revenue growth. Let’s now take a look at the earnings ability, if any and the growth rate in earnings over the last three years.
|EPS Diluted||2010||2011||2012||2013||3 year CAGR|
Priceline once again trumps its peers when the scale of measure is earnings growth. The column on the extreme right displays the three year growth rate in earnings at the OTA’s. One look at the column shows that Priceline’s earnings have grown head and shoulders over the rest of its peers. While Orbitz worldwide and HomeAway have seen a turnaround to profitability, calculating their three year CAGR would be misleading due to losses in the base years. Having looked at the revenue and earnings growth rates, Priceline and Tripadvisor seem to be the clear winners from the OTA space, outperforming the larger sector over the last three years. A look at the current valuations and forward valuations will help to pick the winner from the sector.
Relative Valuation Analysis
Let’s now take a look at the current valuations of the OTA’s (as on Mar 14 closing price. The chart below displays the current and forward valuation multiples of the OTA’s.
|Company||Last traded price in $ (Mar 2014)||LTM EPS in $||LTM P/E ratio||One year forward P/E*||PEG ratio (P/E to Earnings Growth)|
*Forward P/E and PEG ratio as given by Zacks research
The relative valuation analysis brings out Orbitz worldwide and Priceline as the two attractive companies from the OTA segment (PEG Ratio). However, given the profitability and cash flow stability of Priceline, we view Priceline as a safer investment as compared to Orbitz worldwide based on the current valuations enjoyed by the two companies.
Priceline appears a clear winner based on the fundamentals supporting the stock price and the current valuation multiples of the OTA companies. The only downside could be an overall economic slowdown which will negatively impact the entire sector. Even in such a scenario, we feel Priceline would be the best defensive stock amongst its peers. We reiterate our long term positive outlook on this OTA giant and given the latest fall in price, long term investors can look for comfortable gains from this OTA giant. Read our detailed Discounted Cash Flow based Priceline valuation here and also our bull-bear analysis on Priceline, Expedia, Orbitz worldwide, Tripadvisor and many other stocks.