Tune into the morning Travelzoo
Better news greeted investors in travel deals website Travelzoo Inc. (NASDAQ:TZOO) this morning. While maintaining a hold rating on the stock, analysts at Ascendiant Capital Markets upped their price target by 23%, to $32 per share — comfortably higher than the $29 and change the stock costs right now. But is Ascendiant right?
Actually, yes. And in fact, I think the analyst might even still be a bit too conservative here. On one hand, sure, Travelzoo Inc. (NASDAQ:TZOO) at 23 times earnings looks a bit pricey for the 20% annualized earnings growth it’s expected to produce over the next five years. On the other hand(s), though, Travelzoo Inc. (NASDAQ:TZOO) generates about 50% more free cash flow than it gets to report as net earnings on its income statement, resulting in a price-to-free cash flow ratio of just 15. Factor in the $65 million in cash on Travelzoo Inc. (NASDAQ:TZOO)’s books, and the valuation drops even further — to an enterprise value-to-free cash flow ratio of only 12.5.
On a 20% grower, that’s a bargain price. Result: I think Travelzoo Inc. (NASDAQ:TZOO) will hit Ascendiant’s $32 price target… and keep right on running higher.
A new price target for Priceline
Finally, similarly, but from a different analyst this time, we’re seeing shares of Priceline.com Inc (NASDAQ:PCLN) get a price-target bump — this time courtesy of analysts at Cantor Fitzgerald. According to the analyst, this stock is going to $900 within a year, and since Priceline.com Inc (NASDAQ:PCLN) only costs about $837 today, Cantor thinks you should buy it.
But here’s where I break with the Street. While I like Priceline.com Inc (NASDAQ:PCLN) a lot, I don’t believe the stock offers investors a compelling bargain at today’s prices. Here’s why:
Priced at 29 times earnings, and with 20% growth projected, the stock looks expensive on its face. Factor in all the caveats and quibbles we used to prove Travelzoo is actually a bargain, though, and… Priceline.com Inc (NASDAQ:PCLN) still looks expensive. Value it on free cash flow, and the P/FCF ratio drops to 25. Give it credit for its cash reserves, and the valuation drops again — to an EV/FCF of 22.
Both of those numbers, unfortunately, are still higher than the 20% growth estimates for Priceline.com Inc (NASDAQ:PCLN). Meaning: If the company exceeds estimates for its performance by a significant margin, it could indeed be worth buying — but only if it exceeds these estimates, and only if the difference between promise and performance is significant. Merely living up to expectations won’t cut it, and any failure to grow as expected could bring a world of hurt to Priceline shareholders.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends priceline.com. The Motley Fool owns shares of priceline.com.
The article Tuesday’s Top Upgrades (and Downgrades) originally appeared on Fool.com and is written by Rich Smith.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
