Stocks for Cashing In on the Online Travel Boom

“Travel agent” hasn’t yet joined the list of jobs that have faded into memory, such as “carriage operator” and “gas station attendant.” The stunning success of the companies that offer flights, hotel reservations and rental cars suggest that day may not be far off, though.

Despite lofty gains in some of these stocks, it’s not too late to cash in on this relatively young sector’s growth. We’re especially keen on Priceline Group (PCLN), owner of Priceline.com, and Expedia (EXPE). Two other companies — Orbitz Worldwide (OWW) and TripAdvisor (TRIP) — should also benefit from the online travel trend, but we urge more caution with their shares.

Online travel bookings in the U.S. grew by 37% from 2009 to 2013, according to research firm Euromonitor International, but the majority of the world’s travel bookings are still done offline. Expedia and Priceline, despite being the world’s two biggest online travel agencies, combine for less than 10% of global bookings, says Morningstar analyst Adam Fleck.

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Priceline raised eyebrows in September 2013 when the price of its stock crossed the $1,000 mark. Proving that a high price alone doesn’t necessarily make a stock expensive, Priceline shares have since gained 26%, to $1,260.77, on the strength of continued international growth (share prices are as of the August 27 close).

Priceline is best known in the U.S. for its “Name Your Own Price” bidding service and its commercials with Star Trek’s original Captain Kirk, William Shatner. The key to Priceline’s success, however, was the astute purchase in 2005 of Bookings B.V., whose Booking.com has become Europe’s leading hotel-reservation site. Fleck says Booking.com has more than 430,000 global properties in its network, including 200,000 in Europe.

As more hotels list rooms, more consumers will seek out Booking.com, making it appealing to even more hotels. This is a powerful “network effect” that grows stronger over time, Fleck wrote recently. He says Priceline also has a strong presence in several emerging nations.

Analyst Mark Mahaney, of RBC Capital Markets, calls Priceline “one of the best growth stocks in the Internet sector.” He believes Priceline is gaining market share in “practically every market” it operates in. He considers the 29% growth in Priceline’s hotel room bookings in the second quarter particularly impressive because its hotel business is twice the size of Expedia’s. Mahaney says “the large numbers law” will inevitably slow Priceline’s growth, but “it hasn’t really yet.” (Signaling a desire to grow in new ways, Priceline bought restaurant-reservation service OpenTable for more than $2 billion in July.) Mahaney rates the stock a buy and expects it to reach $1,500 in a year, which is 22 times his forecast for the company’s 2015 earnings.

Expedia is the dominant online player in the U.S. The owner of Hotels.com and Hotwire, it produces 3.5 times the U.S. sales that Priceline does. Analysts had high expectations for Expedia’s second-quarter results, and they smashed through them. Expedia reported a 24% increase in revenue from the same period in 2013, a 33% gain in net income and widening profit margins.

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Investors have warmed to the Expedia story: The stock, at $86.50, has soared 86% over the past year and now trades at 21 times estimated year-ahead earnings, just a drop below Priceline’s price-earnings ratio of 22. That has prompted some analysts to suggest that Expedia’s gains over the next 12 months may be limited, even if the long-term future is bright “We think that as the multidecade trend toward booking travel online continues, Expedia will continue to capture market share,” says Fleck, adding that he expects continued double-digit revenue and profit growth. He estimates the stock’s fair value at $94, 9% above the current price.Investors think the third of the U.S.-based online travel sites, Orbitz, will benefit as well. Its stock, currently $8.12, has more than tripled since November and now trades at 20 times estimated earnings over the next 12 months. That’s not much lower than Priceline’s and Expedia’s P/Es, even though Orbitz is expected to deliver much smaller earnings growth over the next few years.

Orbitz was started by several major airlines and initially focused on air travel rather than more-profitable hotel reservations. Its dependence on airlines was underscored on August 26 when Orbitz shares dropped almost 5% on news that American Airlines pulled its flights from the site in a dispute over fees.

The company is trying to catch up to Priceline and Expedia, but RBC’s Mahaney says Orbitz’s smaller size puts it in “a challenging position.”

Expedia spun off TripAdvisor in December 2011. Since then, TripAdvisor’s shares have more-than tripled, to $101.78. TripAdvisor focuses on publishing user reviews of hotels, restaurants and attractions across the globe. The site’s users can then book rooms or flights through links to Expedia, Priceline and other travel sites, which pay TripAdvisor based on user clicks.

Analysts forecast earnings-per-share growth for TripAdvisor of 26% this year and 32% in 2015. That tops forecasts for Priceline (26% and 24%) and Expedia (23% and 18%). Investors must pay up for that edge, however, as TripAdvisor shares trade at 41 times estimated year-ahead earnings, roughly twice the P/E of Priceline, Expedia and Orbitz. TripAdvisor’s projected growth is impressive, but its rich valuation makes it perhaps the riskiest of the online travel companies.