Where Is the Best Value and Growth Combination in Online Travel?

Priceline is without question a great company, but at some point its four-digit price tag has to warrant the question of whether or not you should still buy. With that said, can you find better value and possibly more upside in two of its peers?

How much upside is left?
In a very large and crowded online travel industry, Priceline has emerged victorious with market-leading growth, a strong emerging market presence, and great company investments. In the last quarter alone, the $55 billion company saw revenue growth of 26.6 %.

However, Priceline's EPS grew just 24.1%. While impressive, this means revenue outperformed earnings, thus margins declined. In fact, this highlights a recent trend, where Priceline's margins, especially earnings before taxes, have declined year-over-year.

Priceline blames margin pressure on advertising, but investors should note that much of Priceline's valuation is tied into the performance of its margins. Priceline has operating margins of 34.5%, which stems from a 35% return on equity (good investments). Therefore, investors have to wonder how much upside really exists for a company that's this expensive and with the likelihood for future margin pressure.

Cheaper with room for improvement
Priceline trades at just 35 times earnings, which given its growth, isn't too expensive. However, high margins also means higher profits, thus if margins decline, Priceline's P/E ratio could rise quickly. Therefore, Priceline's 9.25 times sales ratio is more a concern, giving the company very little room for operational error, and insinuating that it's in fact pricey relative to its full-year sales.

In comparison, both Orbitz and Expedia are two companies clicking on all cylinders, and significantly cheaper at 1.2 and 1.8 times sales respectively. In other words, both of these companies trade at multiples that are similar to the S&P 500, but have many times greater growth.

Both Expedia and Orbitz have returns on assets in the 3% range, compared to Priceline at 16.5%, hence both companies have not made near as good of investments over the years. Yet, while many might consider this a negative, it also means there is more room for margin improvement.

A closer look at two values
In Expedia's last quarter, it saw revenue growth of 20% and booking growth of 15% year-over-year, both of which showed an acceleration over the prior quarter. While this level of growth is not quite to the level of Priceline, investors should remember that Expedia is also a significantly cheaper stock

Moreover, Priceline has a market capitalization that is nearly seven times greater than Expedia, yet revenue that is only 28% more, hence there is a large disconnect between valuation and the actual size of both companies.

Orbitz is without question the smallest of the three companies, with just $816 million in trailing 12 month revenue. However, its room for progress (as explained prior) and its double digit growth makes it appealing nonetheless.

Over the last year, Orbitz has been one of the best performing stocks in the market, posting gains of 275%. This has occurred after consistently beating quarterly estimates and raising both full-year revenue and EBITDA guidance, including in its most recent quarter. This fact makes Orbitz a very compelling investment opportunity.

Final Thoughts
Like I said, Priceline is the Wall Street favorite - five year gains of 200% -- but after years where stock performance exceeds fundamental growth, it is no longer a value investment. Therefore, it is not the best buying opportunity.

Instead, investors can capitalize on similar growth to Priceline with the valuation of Travelzoo by owning either Orbitz or Expedia. As a value investor, this strategy looks to be the most lucrative opportunity within the space.

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The article Where Is the Best Value and Growth Combination in Online Travel? originally appeared on Fool.com.

Brian Nichols owns Expedia. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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