Just prior to the Beijing Olympics in 2008, I wrote an article about the booming travel business in China. Well-known investor Jim Rogers was on record that the Chinese themselves would spend huge amounts on domestic and foreign travel as their standard of living rose and travel restrictions eased. One company benefiting from this growth is Universal Travel Group (NYSE:UTA), a micro-cap holding company whose mission is to become the country's largest travel business. With foreign travel on its radar, I'll look at why its stock remains a steal.
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How It Makes Money
Universal Travel Group's three revenue streams include packaged tours, hotel bookings and airline ticketing. It currently focuses on the domestic tourism market for both leisure and corporate travelers. Packaged tours represent 69% of its revenues with hotel and airline reservations accounting for the rest. In terms of profitability, the hotel and airline business delivers much higher gross margins than the packaged tours. However, its dominance in packaged tours in comparison to competitors Ctrip.com (Nasdaq:CTRP) and eLong (Nasdaq:LONG) provides a nice barrier to entry.
In late January, it was awarded an international travel license by China's National Travel Authority, which gives it the right to sell package tours directly to its clients for destinations outside China. Prior to the awarding of this license, it had to go through other agencies, which obviously affects profitability. Chinese tourists spend approximately $44 billion on travel outside the country, so this could be a big deal.
In 2010, UTA signed a deal with Agoda, Priceline.com's (Nasdaq:PCLN) Asian subsidiary. Under the terms of the agreement, Agoda would provide Universal Travel Group with access to its international network of hotels. Most importantly, it would work with the company to improve its cnutg.com website. This is vital when you consider the negative press it's received from Bronte Capital and Henry Blodget about the legitimacy of its business. While neither may truly understand Universal's business model, any negative press about its online operations is counter productive. Known primarily as an offline travel provider, over the past two years it opened approximately 2000 kiosks throughout China. The interactive terminals allow customers to research and make travel arrangements just as they would online. It's all about meeting the customer where they live. Lastly, it continues to buy travel agencies. In the third quarter ended September 30, acquisitions accounted for $11.6 million or 25% of its $46.3 million in revenue. With $56.7 million in cash, it is likely we'll see acquisitions continuing.
While its detractors doubt its business model, I see nothing but growth. At the end of the third quarter, it projected full-year 2010 revenues between $145 million and $155 million with earnings per share of at least $1.35 excluding stock-based compensation. Five years ago, revenues were just $10 million. Its price-to-sales ratio in April 2008, when I wrote my previous article about the company, was 0.94 and today it's the same, despite sales and profits doubling. If you include Orbitz Worldwide (NYSE:OWW) and Expedia (Nasdaq:EXPE) with the three competitors mentioned earlier, its price-to-earnings ratio is one-twentieth of its peers.
Either Priceline.com management is foolish, or this is a legitimate business that's severely misunderstood. It's up to you to determine if the reward is worth the risk. I believe it is. (For related reading, also check out Top New Trends In Airline Travel.)
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