Going in Circles at Orbitz

It's OK to be cynical after watching shares of Orbitz Worldwide (NYSE: OWW) climb 6% yesterday. Goldman Sachs initiated coverage with a "buy" rating, but that's not really the whole story.

See, even though the shares moved up to $11.93 yesterday on the analyst upgrade, they've still got a long way to go to hit the $15 mark where they went public less than two months ago. And it's at this point that you have to remember that Goldman served as one of the lead underwriters of the disappointing offering. It pitched the stock to many of its clients at $15, and those initial investors are now underwater.

So it's easy to snicker at the overly ambitious $18 year-end price target, the claim that the company is "well positioned within the online travel industry," and a 15% annualized growth target over the next five years.

Those $15 investors would love to get out of 2007 with a 20% gain instead of the 20% loss on paper they're staring at now. How likely is that, though?

Look, I'm not suggesting that a conspiracy is at play here. Goldman wouldn't have helped usher Orbitz back as a stand-alone public company for the first time in three years if it didn't believe in it. Reputations are ultimately more valuable than near-term underwriting fees. However, I'm always skeptical when considering the source of analyst moves. Oh, that and the fact that I disagree with the thesis behind Orbitz bouncing back so soon.

When "well-positioned" really means "positioned by the well"
If Orbitz is so well positioned in the industry, why is it that publicly traded rivals like Expedia (Nasdaq: EXPE) and Priceline.com (Nasdaq: PCLN) are growing faster? Expedia and Priceline also happen to be consistently profitable, something that Orbitz has never been over the course of an entire year.

So what's with the party hats, folks? Until proven otherwise, Orbitz is more of a laggard than a leader. Its strength also happens to be in the most challenging travel segment of all. The company's specialty has always been selling airline tickets. It was originally funded by a consortium of legacy carriers, looking to take back a little control from fast-growing portals like Expedia and Travelocity as "lookers-to-bookers" ratios were flying through the roof. Orbitz is still earning its wings that way. Airfare bookings accounted for more than $2.2 billion of the nearly $3.0 billion in gross bookings this past quarter.

Do you really want this to be your core strength? You've no doubt heard of the record flight delays this summer. High fuel prices and dissatisfied travelers are a combustible combination, even before you factor in the potential of a weakening economy.

You also have a sector where many of the carriers are reaching out directly to the consumers. You won't find discounters like JetBlue (Nasdaq: JBLU) or Southwest (NYSE: LUV) on Orbitz, or most of the popular portals for that matter.

Southwest would rather tempt you into downloading its cleverly marketed Ding desktop tool to alert you to last-minute discounts than send you scrambling elsewhere like Orbitz or the Orbitz-owned CheapTickets.com. Old-school carriers are also trying to cash in with direct relationships. After all, these are the same folks who began frequent-flyer programs to encourage brand loyalty.

Destination unknown
Am I being too hard on Orbitz? Well, someone has to be. Bulls can argue that earnings -- check that, adjusted EBITDA -- are expected to grow in the coming years. However, that assumption is based on booking gains and widening margins. Orbitz, like all of the portals and even travel publishers like Travelzoo (Nasdaq: TZOO), will not be immune if unsure economies curtail corporate and pleasure travel.

The devil's advocate to my devil's advocate could counter that I'm ignoring the upside. The company's reliance on air ticketing opens up the growth in higher-margin areas like hotel, car rental, and package bookings.

Show me first, I would argue. Investors deserve that much, especially those who got hoodwinked into buying their shares at $15 back in July. There's strength in Europe through the company's eBookers arm, but that's already baked into the projections. In the end, I'm still not sure why the company should matter more in the future than it does now.

Even the bulls can be skeptical. In his otherwise upbeat note, Goldman analyst Anthony Noto notes that Orbitz has "minimal pricing power or sustainable competitive advantages" here. And the stock is supposed to soar 50% higher over the next few months ... why, exactly?

Take a nonstop flight to some of these connecting articles:

• Orbitz Comes Full Circle
• Orbitz Earns Its Ticker Symbol
• Get out of Town Fast!