Back in January, I wrote an article titled “Management Matters: Be Careful Investing in these Companies,” which included Trazelzoo and its one-day gains of 24% after posting Q4 earnings. My point was that earnings weren’t that good, and that investors should remember the past when director Ralph Bartel sold almost 2.5 million shares for an average price of more than $75.00 while other executives “pumped” the stock. The truth was that Bartel was smart, as Travelzoo Inc. (NASDAQ:TZOO) had no business trading at such inflated prices. But my point was to view optimism surrounding this company with a glass-half-empty mentality.
Travelzoo Then and Now
At $75 per share, Travelzoo was trading with a market cap of $1.1 billion; today its market cap is $375 million. At $1.1 billion, the company was seeing top line growth of roughly 30% and was trading with a price/sales ratio of about 10.0. Furthermore, the stock had a P/E ratio in triple digits. Today, the metrics are much more favorable: The stock trades with a price/sales below 2.50 and has a P/E ratio of 21.50.
After a year of flat trading, Travelzoo Inc. (NASDAQ:TZOO) now appears to be fairly valued, and has rallied 28% in 2013. For its most recent quarter the company saw revenue growth of 7%, net income growth of 49%, strong growth in both North America and Europe, and subscriber growth of 5% year-over-year.
When you think of the fast-growing booming internet company space, including the likes of Yelp and Zillow, Travelzoo appears to be growing slow. In fact, even when compared to its industry with companies such as Expedia Inc (NASDAQ:EXPE) and Priceline.com Inc (NASDAQ:PCLN), it appears to be growing slow. But Travelzoo is different — first off its business model includes the sale of travel packages, not necessarily flights and hotels. Yet with sales of less than $200 million there is a lot of room for growth.
Travelzoo Compared to its Industry
What I like about Travelzoo Inc. (NASDAQ:TZOO) is that the company is growing, although slowly, and is fairly valued. From an investment perspective I consider it to be better than Priceline.com Inc (NASDAQ:PCLN) but worse than Expedia.
| Travelzoo | Priceline | Expedia | |
|---|---|---|---|
| 1.Market Cap (millions) | $375 | $34,690 | $8,380 |
| 2.P/E Ratio | 21.50 | 25.15 | 30.96 |
| 3.PEG Ratio | 0.96 | 0.99 | 1.39 |
| 4.Price/Sales | 2.47 | 6.54 | 2.03 |
| 5.Operating Margin | 18.85% | 35.16% | 13.57% |
1. One of my knocks on Priceline is its size. The online travel industry has very few barriers to entry and Priceline commands the largest piece of the pie. Granted there is a large global market; I think Priceline.com Inc (NASDAQ:PCLN)’s size actually weighs in the favor of Expedia and especially Travelzoo in terms of upside.
2. Compared to earnings, none of these companies are what I would call “overvalued,” although Travelzoo is the cheapest.
3. The PEG ratio is a prediction of future growth that takes into account valuation and current earnings. In theory, a PEG ratio of 1.00 equals fair value (only with earnings). As you can see, both Priceline and Travelzoo Inc. (NASDAQ:TZOO) are considered “fair value,” although I do wonder where the next five years of explosive growth comes from for Priceline.
4. The price/sales is a company’s value compared to sales, and Expedia Inc (NASDAQ:EXPE) is by far the cheapest. This is encouraging for both Travelzoo and Expedia because it suggests that minor changes could be implemented to improve margins and ultimately boost earnings.
5. Priceline, with operating margins of 35.16%, leads me to wonder the upside for margin growth. Expedia and Travelzoo still have room to grow margins, especially Expedia Inc (NASDAQ:EXPE). As a result, I give the nod to Expedia due to its potential to grow margins and its cheapness relative to sales. Travelzoo has the same upside to a lesser degree, and Priceline appears to be operating with such efficiency and is so large that I believe the upside is less.
Conclusion
It is not uncommon for fundamentals to cause you to change your mind about an investment. In regards to Travelzoo Inc. (NASDAQ:TZOO), I still have the same problems outlined in my first article, but I do believe that the company is fairly valued and find its 5% growth last quarter and its 7% growth this quarter as progress. Furthermore, I find its margin growth highly encouraging, and now with it trading around $24, I would look closely at its upside from this point.
The article Has this Online Travel Company Turned the Page? originally appeared on Fool.com and is written by Brian Nichols.
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