Is It Finally Time to Buy Travel Stocks?

TripAdvisor (NAS: TRIP) recently reported quarterly earnings of $0.38 per share on revenue of $197.1 million, versus analysts' estimates of $0.41 per share on $203 million in revenue. The markets promptly punished the online travel company, spun off by Expedia (NAS: EXPE) in December 2011, by sending its stock down 16.77% to $36.18. Expedia and priceline.com (NAS: PCLN) stock prices were down "in sympathy," 4.47% and 5.19%, respectively. TripAdvisor's revenue shortfall resulted from a change in how it measures pay-for-click traffic when its site visitors click on advertisements and then book travel on advertisers' sites. TripAdvisor offers reviews and flight searches, but redirects visitors to other sites for final booking.

TripAdvisor is rated in The Motley Fool Earnings Quality Score database as an "F" for earnings quality. The database ranks stocks "A" through "F" based on price, cash flow, revenue, and relative strength among other things. Stocks with poor earnings quality tend to underperform, so we look for trends that might predict future outcomes.

Metric

6/30/2012

6/30/2011

6/30/2010

Revenue (millions) $197.1 $169.2 $125.41
YOY change 16.49% 34.92% --
Gross margin 99% 98% 99%
Selling, general and administrative 42% 37% 34%
Operating margin 42% 50% 52%
Net profit margin 27% 32% 32%

Source: S&P Capital IQ.


TripAdvisor's 99% gross margin results from no inventory and virtually no cost of goods sold. Revenue rose by 16.5%, but only half the prior year's rate of increase. Selling and administrative costs rose 13.5% during the year, from 37% to 42% of revenue, and the trend is up. Therefore, operating and profit margins continue to deteriorate.

The devil is in the details, and TripAdvisor's margin erosion is only half of the story. The cash management picture is so scary it's like being in a Final Destination movie. Accounts receivable stand at $96.87 million and days sales outstanding are 45 days -- OK, but not great. The company has $28.41 million in payables, but days payable outstanding are at 886 days, up from 727 days year over year. For a company with quarterly operating cash flow of $61.76 million, this is unacceptable.

Lastly, the company issued $396 million in debt during the year, but paid Expedia $405 million related to the spinoff.

TripAdvisor's price-to-sales ratio of 8.9 highlights the market's high expectations. Even with the recent price decline, the P/E still stands at 27.41, higher than revenue or earnings growth trends. Since trading began last year, the stock has advanced 31.8%. Revenue is expected to rise 21% to $771.09 million. Based on declining economic conditions in Europe and continued weakness in the U.S., I would not be betting against the devil anytime soon.

Expedia
Last Thursday, Expedia reported better-than-expected earnings and revenue for its second quarter, assisted by higher hotel bookings. Its acquisition of Via Travel last March also helped its numbers. As a result, the stock rose nearly 20% to $54.90 a share. The company reported revenue of $1.04 billion and earnings per share of $0.89 versus $1.024 billion and $1.00 per share earnings for the year-ago quarter. These numbers represent a modest 2% year-over-year revenue increase, and an 11% earnings decline.

In addition to slight revenue increases, Expedia's costs are also rising. The cost of goods sold, while only 22% of revenue, is up from 19% last year. Administrative costs are very high at 51% versus last year's 47%. Operating and net profit margins have fallen as a result to 15% and 10%, respectively. The company carries no inventory but receivables rose 9% year over year.

Like TripAdvisor, days payable outstanding are a whopping 506 days. Worse yet, payables equal $1.275 billion, which is 123% of revenue. In addition, Expedia carries $1.249 billion in long-term debt. There is no excuse for this cash-flow manipulation because Expedia has decent cash flow metrics.

Expedia carries $1.815 billion in deferred revenue on its balance sheet. This unearned revenue is a good thing as long as the company continues to deliver: If any of this prematurely finds its way as revenue on the income statement, it's a bad thing as it would be an overstatement of revenue.

Expedia's shares have risen 85% since January, and its revenue and earnings growth rates don't justify this price appreciation -- especially in a lukewarm economic environment. Use the recent price jump to take profit.

priceline.com
priceline.com will report quarterly numbers Aug. 7. I wrote about priceline.com in April and warned that its price would likely abate from its lofty $745 at the time. The stock started 2012 at $485.15, rising 30% to around $630, until Friday, when the stock rose "in sympathy" with Expedia's earnings report to $678, a 40% price increase. Analysts are expecting priceline.com to report $7.26 earnings on $1.35 billion in revenue, increases of 32.24% and 22.73%, respectively.  I still believe priceline.com is overpriced at this level and you should expect fairly large price swings going forward.

Foolish bottom line
While the environment going forward for these stocks looks varied, the Fool recently detailed one of the most intriguing buys in tech now, Chinese search engine Baidu. We detail it in our brand-new premium report on Baidu, which you can access by clicking here today.

The article Is It Finally Time to Buy Travel Stocks? originally appeared on Fool.com.

Fool contributor John Del Vecchio is Co-Advisor to Motley Fool Alpha and co-manager of the Active Bear ETF (NYS: HDGE) . You may follow him on Twitter @johnfdelvecchio. He does not own any shares in the companies mentioned in this article. The Motley Fool owns shares of TripAdvisor, priceline.com, and Baidu.com. Motley Fool newsletter services have recommended buying shares of priceline.com, Baidu.com, and TripAdvisor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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Hi Susan

Trip Advisor used to have very good information - it is now becoming a boring blog room for seniors, who rarely travel. For example, on the San Francisco forum, people are answering questions about Oakland Airport and they lead off the statement saying they have not traveled by plane for some years now. There is one person in San Francisco, who says she used to work for a travel visitor site some 30 years ago, and has no idea what anyone under 40 likes - she is pushing 70 and she has her cohort of friends. As such, if you want a vacation for a 70 year old, then Trip Advisor is good for that age....It is NOT in any way good for anyone under the age of 40; or for those wanting a fun night out. The forum people are no longer friendly - they bully first time people who ask questions. Many of the better experts have long since left the site. This is happening across California.

As such, Trip Advisor is aging out much faster than anyone expected. Most young people (under 40) are going to YELP and they are computer savvy enough to be able to do search across the various features of YELP to plan a good trip there (even if the main reason for YELP is not trip planning.).

Trip Advisor itself is getting more bully itself - it has features to say if you are being harrassed. However, more than X number of people have to click on the post to have the post go away. As such, if you are harrassed on Trip Advisor, there is nothing you can do about it. Bullies on Trip Advisor can trash many good people. For example, t here is a theme park expert in Anaheim who is in the know on everything; there is a 70 year old in San Francisco who is nasty and mean to him every chance she gets. She is not adding anything close to trip advisor friendly information - just bashes many people. Trip Advisor fully endorses this it seems with their inability to flag inappropriate posts without having many flag the same ones. Its a shame.
As such, Trip Advisor is aging itself out pretty quickly - or they need to address quickly addressing the concerns of the under 40 age person - a market Trip Advisor seems to be ignoring.

August 06 2012 at 7:48 PM Report abuse rate up rate down Reply