Is Travelzoo's Stock Headed for a Turnaround?

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There may be stormy weather ahead for the market. A long weekend didn't give investors much of a vacation, as ADP's employment numbers on Thursday presaged a worse report from the Bureau of Labor Statistics. In wobbly times like these, it becomes even more important to do some homework on the companies you own or have your eyes on. Those that can outperform in the future often leave a trail of positive signals in the past. With that in mind, let's take a look at Travelzoo (NAS: TZOO) to find out if it fits the bill for future success.

Break it down
I wanted to take a look at Travelzoo precisely because it's been so hard-hit over the past year. The market sometimes overreacts to bad news, after all. Apart from Travelzoo and Expedia (NAS: EXPE) , online travel companies have done rather well in the past 12 months. Is Travelzoo now a bargain, or is it a value trap heading for more trouble? Here are some key numbers to consider:

Metric

Trailing-12-Month (or most recent) Result

Annual revenue$148 million
Annual net income$3 million
Profit margin2.2%
Annual free cash flow$13 million
Market cap$343 million
Price to earnings ratio107.5
12-month stock price decline(72.3%)
Subscribers24 million
North American revenue73% of total revenue

Sources: Yahoo! Finance, Morningstar, Google Finance, and corporate 10-K filing.


Worth its weight?
Stockholders that stuck with Travelzoo have been rewarded -- assuming they got in at recessionary lows and fled during the stock's epic run-up last summer. For many others, it's been a rather frustrating ride. The popping of Travelzoo's bubble coincided neatly with a big drop in bottom-line results, as you can see from the following chart:

TZOO Total Return Price Chart

TZOO Total Return Price data by YCharts

However, an encouraging uptick following that disaster hasn't been met with renewed excitement. At a P/E ratio of over 100, Travelzoo lags far behind priceline.com (NAS: PCLN) and TripAdvisor (NAS: TRIP) , and it still looks positively bubblicious next to Expedia's single-digit P/E. However, I don't want to count Travelzoo out on such a straightforward review. Since the company's free cash flow is much higher than its net income, let's compare Travelzoo to its peers on that metric:

Company

Market Cap

TTM Free Cash Flow

P/FCF

Travelzoo$338.1 million$13 million26.0
priceline.com$38.2 billion$1.30 billion29.4
TripAdvisor$4.9 billion$197 million24.9
Expedia$4.5 billion$822 million5.5
Groupon (NAS: GRPN) $8.9 billion$232 million38.4

Source: Morningstar. TTM = trailing-12-month.

Expedia again looks like the cheap one, but on a free-cash-flow basis, Travelzoo compares much more favorably to its peers. Unfortunately, analysts don't seem to give much weight to this comparison and haven't predicted exceptional growth for the company going forward:

Company

2012 Projected Growth Rate

5-Year Projected Annual Growth Rate

Travelzoo19.2%19.9%
priceline.com33%22.9%
TripAdvisor20.4%14.6%
Expedia0%10.4%
Groupon130.6%28.8%

Source: Yahoo! Finance.

Maybe Expedia was the cheap one for a reason. Still, every other competitor easily trounces Travelzoo's projected growth this year. Going forward, things look a little better, but not better than Priceline, and certainly not better than deal behemoth Groupon.

Half-off profit is a bad daily deal
There may yet be something to be said for Travelzoo's revival. An annual growth rate around 20% is nothing to sneeze at for a company with a long track record of profitability. To earn its turnaround, Travelzoo will need to avoid the daily deals red ink that still plagues Groupon. Thus far, that business model hasn't shown resistance to competitive encroachment; size alone isn't enough to guarantee a moat, and Travelzoo is hardly the biggest fish in the sea.

Despite these worries, forward estimates expect Travelzoo to sport a lower P/E next year than all competitors save Expedia. If that bears out, it would make today a good entry point. Fellow Fool Dan Caplinger thinks there may be sharks sniffing around for a good meal as big technology companies look to diversify, and even a doubling of the company's market cap would be a drop in the bucket for Google or Microsoft.

Foolish final thoughts
A buyout offers the possibility for big gains, but so does gambling. For the time being, I'm content to watch Travelzoo from a distance to see if it can win in this brave new world of deep discounting. If you'd like to join me in keeping an eye on this travel company, click here to add Travelzoo to your Watchlist.

Plenty of companies try to change the game, but only a few succeed. Travelzoo has a chance to be a Rule-Breaking multibagger. But guess what -- plenty of companies have already done it. The Motley Fool's got all the information on one stock that's brought big gains to our subscribers, and we're offering a brand-new free report that will tell you why we're certain it's still got plenty of gains ahead. Click here to find out the name of "The Next Rule-Breaking Multibagger."

At the time this article was published Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool owns shares of Google, TripAdvisor, and Microsoft. Motley Fool newsletter services have recommended buying shares of Google, priceline.com, Microsoft, and Travelzoo. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. 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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