The online travel world is getting smaller, as only two players remain and/or own the other smaller players, thanks to the Expedia Inc’s (NASDAQ:EXPE) stupid purchase of Orbitz Worldwide, Inc. (NYSE:OWW).
That’s right, I said it! It was a stupid purchase just like Priceline Group Inc’s (NASDAQ:PCLN) purchase of OpenTable Inc.
But I digress.
Let’s compare these two big shots and see which you should hold in your portfolio, because you should have one. Travel is booming and will continue to boom — and these guys are making tons of money.
PCLN Stock
PCLN stock is up 438% over the past five years. It owns Booking.com, agoda.com, KAYAK, rentalcars.com and OpenTable, besides its own flagship site. Its numbers are crazy good.
Its fourth quarter delivered $10.7 billion in bookings, a 17% increase year over year, and 23% on constant-currency basis. Gross profit was $1.7 billion, up 26%, and international operations contributed almost 85% of that amount. Net income was $577 million or $10.85 per share, up 23% from last year’s $8.85 per share.
For the full year, net income was $2.8 billion, up 29%.
The balance sheet is insane — $8 billion in cash offset by only $3.8 billion in debt, or about $83 in cash per share. Free cash flow has always been fantastic because there is very little in capital expenditures in a company like this. It was about $2.8 billion last year, up about 25%.
The stock trades at about $1,220, and backing out net cash, you get $1,137 per share. Earnings for the 2015 fiscal year are a bit difficult to peg because of currency issues affecting international companies such as PCLN. Right now PCLN stock is pegged at $58.65, with long term growth at 20%. If so, fair value is $1,172, so the stock is arguably undervalued by a little bit. On 2016 earnings of $67, fair value would be $1,340.
Priceline stock is a great investment for the long term. I hate the OpenTable purchase for $2.6 billion because PCLN paid a zillion times earnings for something that won’t contribute that much profit to the business. Yeah, I know they think it gives them cross-marketing opportunities, but why pay so much for marketing?
EXPE stock
Expedia stock is also worth considering. and is arguably more diversified than Priceline stock. The 2014 fiscal year was a great one for Expedia stock with gross bookings up 28%, revenue up 21%, U.S. bookings up 29% and U.S. revenue up 24%. International revenue rose 11% on an 18% increase in bookings.
Expedia earnings ran into trouble in the aggregate, however, due to some really awful currency effects. Backing those out, EPS was $3.96, up 23% for 2014. Fourth-quarter earnings actually fell 7% from the previous year, thanks to the currency impact.
Expedia is also investing a lot of money in all of its websites, and is losing money on its eLong.com travel unit, which is for China travel.
The company has $2.1 billion in cash, but $1.7 billion in debt, giving it a net cash position of $3 per share. The stock trades at $92, and backing out cash, at $89 per share. Long-term earnings growth is pegged at 16%. On 2015 earnings of $3.90, that puts fair value at $62.50, and on 2016 earnings of $4.70, fair value is at $74.
Either way you look at it, Expedia is significantly overvalued.
I also hate the Orbitz purchase, which set them back more than $1 billion. Stupid. Again, its about cross-marketing, and I think that’s just plain dumb. Nobody uses Orbitz. That’s why it makes no money.
If cross-marketing were such a great idea, you’d think that the multitude of online assets owned under all the various tracking stocks of Liberty Media Corp (NASDAQ:LMCA) would be hyping each other constantly. There’s none. If John Malone and Greg Maffei don’t do it, then don’t do it.
PCLN vs. EXPE: The Verdict
You either buy Priceline here, or if you can’t afford it, do what I do and sell naked puts six months out that are $150 or more out of the money and collect the big premium.
Lawrence Meyers holds PCLN Jul$1,030 naked puts.
