Which Is the Better Stock: priceline.com or Travelzoo?

More than anything else, managers determine returns. They set strategy, hire key team members, oversee operations, and cash paychecks. Every move they make either enhances or destroys shareholder capital.

It pays to know who these men and women are, how they're paid, whether they, too, are owners, and how they perform versus competitors in certain key metrics. In this regular column, I'll examine all that and more with the goal of enhancing our understanding of some of the top stocks in Fooldom.

Next up: priceline.com (Nasdaq: PCLN  ) . Is the executive team of this digital travel agency doing all it can to earn you outsized returns?

Foolish facts

Metric

priceline.com

CAPS stars (out of 5) **
Total ratings 1,243
Percent bulls 73.7%
Percent bears 26.3%
Bullish pitches 80 out of 126
Highest rated peers drugstore.com, PetMed Express, Acorn International

Data current as of Feb. 24.

Say what you will about priceline.com's kooky ads, its price-driven travel bookings engine is about to get a lot more important. Mideast turmoil has pushed oil to more than $100 a barrel and forced the major airlines to raise prices.

United Continental Holdings (NYSE: UAL  ) kicked off an industrywide rate hike on Wednesday with a $20 fuel surcharge for most domestic flights, according to reporting by the Triangle Business Journal. American Airlines quickly followed suit.

Base ticket prices are also going higher. According to The New York Times, some carriers have increased summer fares by as much as $250. Others have introduced "peak travel" surcharges of between $20 and $60 per round trip. If this keeps up -- and there's no reason to believe it won't -- travelers are going to need priceline.com to help them find otherwise elusive bargains.

To its credit, management isn't waiting for a flood of bargain seekers to show up at its door. Instead, they've committed to expanding in Asia and South America via its Booking.com hotel room finder, which now represents 120,000 hotels in 99 countries. Worldwide hotel room reservations rose 51% to $22 million in the fourth quarter.

Overall, adjusted fourth-quarter profit surged 71% on rising margins. Revenue improved 35% to $731 million. Gross bookings -- which includes the total dollar value of consumer purchases made through priceline.com, including taxes and fees -- rose 44% to $3.26 billion. All signs point to priceline.com increasing its share of U.S. and international travel bookings.

Management overview

Executive

Years

Cash Compensation

Shares Owned*

Jeffery Boyd, Chief Executive Officer 10 $2,850,000 27,828
Robert Mylod, Jr., Vice Chairman and Head of Strategy 11 $1,920,000 93,469
Daniel Finnegan, Chief Financial Officer 7 $890,000 9,525
Christopher Soder, President, N. American Travel 11 $956,000 10,000

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 24.)
* Direct holdings only.

The results have to be gratifying to priceline.com's employees and executive team. CEO Boyd has been on staff for 11 of the company's 14 years of existence. Mylod and Soder have been around slightly longer.

They've made a killing over the years. Shares of priceline.com are up 19-fold since May 2004, when Fool-co-founder David Gardner first recommended the company to Motley Fool Stock Advisor members. Latecomers have done well, too. The stock has doubled over the past year.

You'd think the run would make shares of priceline.com unreasonably expensive. I'm not so sure, even though on the surface it looks like it: Capital IQ shows the stock trading for about 51 times trailing normalized earnings. Trouble is, priceline.com was trading for 42 times normalized earnings at the end of 2009. Doubling the stock price hasn't doubled the earnings premium.

Management analysis versus competitors

Company

Insider Ownership

Gross Margin

ROC*

ROE**

Expedia (Nasdaq: EXPE  ) 3.64% 79.3% 11.5% 15.7%
Orbitz Worldwide (NYSE: OWW  ) 1.38% 79.7% 6.0% (36.4%)
priceline.com 1.23% 61.9% 25.5% 33.7%
Travelzoo (Nasdaq: TZOO  ) 66.59% 93.6% 38.3% 34.3%

Source: Capital IQ, a division of Standard & Poor's. (Data current as of Feb. 24.)
* Return on capital. ** Return on equity.

Clearly, Travelzoo and priceline.com are the class of this group when it comes to profitable growth. Heady returns on equity and capital suggest both companies will deliver strong long-term performance for shareholders.

Travelzoo has yet to make good, but I'm beginning to wonder if the bearish sentiments I expressed in November are shortsighted. Here's what I wrote back then:

For as much as I relish the buyout speculation and improving fundamentals, I've yet to identify a clear competitive advantage that makes the stock any more attractive than its similarly priced peers.

Maybe it's time to rethink that position. Travelzoo trades for a lower premium to normalized earnings, yet has better gross margins and is just as efficient at capital allocation as priceline.com. And best of all, the company stands to benefit just as much as priceline.com does from bargain shopping travelers. I like that combination. So, as of today, I'm ranking Travelzoo to outperform in my CAPS portfolio.

Do you agree? Disagree? Using the comments box below, let us know which stock you'd rather own: priceline.com or Travelzoo. You can also post a YouTube link to your favorite priceline.com ad (here's mine) or rate the stock in Motley Fool CAPS.

Interested in more info on the stocks mentioned in this story? Add Expedia, Orbitz Worldwide, priceline.com or Travelzoo to your watchlist.

priceline.com is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. 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 owns shares of PetMed Express and is also on Twitter as @TheMotleyFool and its disclosure policy is managing just fine, thanks.


Read/Post Comments (2) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2011, at 7:30 PM, StockMillionare wrote:

    See my blogs on Priceline I am bullish on the stock.

  • Report this Comment On February 25, 2011, at 6:58 AM, johnvanjohn wrote:

    I agree with the outlook you present on Travelzoo. They seem like they have a great infrastructure and great European presence, China etc. The CEO is going to be on Cramer tonght so I'm interested to see what he has to say. It looks like great value alongside Priceline.

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