Bull vs. Bear - Now's The Time To Buy Travel Stocks

By Ryan C. Fuhrmann | August 07, 2012 AAA

Question: Is now a good time to invest in travel stocks?

Bull's Response
There is much to dislike about investing in the travel and leisure industry. The biggest potential negative is that travel is cyclical. Consumers tend to stay closer to home during an economic downturn and avoid spending on a discretionary vacation. European travel trends have especially slowed down rapidly as of late, given the economic woes over there.

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Industry Update
Furthermore, the capsizing of the Costa Concordia off the coast of Italy earlier this year has scared off tourists from the cruise ship industry. Terrorist threats and other geopolitical fears also have a big impact on booking activity, though it tends to be more localized and in the regions of concern. Finally, volatile fuel costs make investing in the cruise ship space, such as with the industry leaders Carnival (NYSE:CCL) and Royal Caribbean (NYSE:RCL), as well as airlines quite difficult.

There is a rapidly growing segment of the industry that is worthy of investment consideration. This pertains to online travel companies. They are growing rapidly. For instance, Priceline.com (Nasdaq:PCLN), though its results recently hit a short-term blip over a drop in European bookings, is projected to grow its sales close to 25% this year. 2013 should be nearly as fast at 22%, when sales are expected to end the year at close to $7 billion.

SEE: Can Earnings Guidance Accurately Predict The Future?

TripAdvisor (Nasdaq:TRIP) is another star industry performer. Analysts project close to 19% sales growth in each of the next two years and sales of nearly $1 billion within a couple of years. TripAdvisor was recently spun out by Expedia (Nasdaq:EXPE) and has been capitalizing on social media to grow its online booking activity. It also relies on the opinions of its millions of registered users and the social aspect of seeing where friends are traveling to, which restaurants they like and what deals they are finding.

Speaking of Expedia, analysts project double digit top-line growth in each of the next two years and sales just above $4 billion by the end of 2013. Orbitz Worldwide (NYSE:OWW) qualifies as an industry laggard, but should still see very respectable sales growth in the high single digits going forward. It should log total sales near $900 million by the end of next year to put it close to TripAdvisor in terms of total revenues.

SEE: Best Places And Sites For Online Travel Deals

Online travel bookings have steadily stolen share from traditional travel agents in recent years. As with many other industries, including electronics, retailing, music, movies and other media, and financial services, consumers rely on the Internet to purchase products and utilize web-based services. Travel is nothing different and allows consumers the flexibility to track destinations they want to visit. Better yet, they can act when a sufficient deal arrives or if a friend highly recommends a hotel.

Advertising is another important avenue that these web-based travel sights have over other travel-related investments. TripAdvisor relies on advertising placements for a significant percentage of its revenue, as do the other rivals. This space is intensely competitive and brings in less revenue than other advertising outlets (such as television, newsprint, or billboards), but online is again experiencing rapid growth at the expense of more mature advertising alternatives.

SEE: Don't Be Misled By Investment Advertising

The Bottom Line
There is little concern among investors that online travel companies will continue to grow their sales rapidly going forward. The trick will be to invest in that growth at the right price. For the most part, the appealing expansion prospects are these firms are already reflected in their valuations. On an earnings basis, TripAdvisor trades at a forward P/E close to 25 while Expedia is closer to 19 times.

Priceline's forward P/E is now around 18 and it has recently become much more affordable given the European booking woes. Orbits looks like the value play of the group and is at a P/E below 15, but is not growing as robustly as its archrivals. A couple more years of double-digit growth could make these players look much more affordable, and there should also be opportunities to pick up the leaders at more appealing entry points on short-term negativity on their bright futures. Priceline is a current case in point.

At the time of writing, Ryan C. Fuhrmann did not own shares in any company mentioned in this article.

Don't forget to read the Bear Side of this debate and weigh in with your opinion below.

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