The house rules are simple in this weekly column.
I bash a stock that I think is heading lower. I offset the sting by recommending three stocks as portfolio replacements.
Who gets tossed out this week? Come on down, Expedia
Flying the unfriendly skies
It's been a busy month for Expedia, and I'm not talking about folks flocking to the gnome home to book their holiday travel plans.
Expedia completed its spinoff of TripAdvisor
The moves are probably more important than you think. Breaking out TripAdvisor should help investors realize the value of the fast-growing travel reviews website, but it makes Expedia more of a pure play in the commodity that online travel bookings has become.
Google's move -- where it essentially is putting its $700 million acquisition of ITA Software to use by spitting back flight times and rates when someone punches in a pair of airport codes -- is going to make it harder for Expedia and its rivals to get noticed.
Airlines love it. Google's flight search data links directly to the carriers, sparing them the middleman commissions that they have to pay booking websites. Expedia used to be the top organic result in many popular queries such as "LAX to LGA," but now it's buried behind Google's more useful and convenient fare aggregator. The only way to rank ahead of Google's booking box is to be one of the top keyword bidders for a particular route.
In short, acquiring traffic just got a little more expensive for Expedia.
Booking flights was already a problematic business for the travel giant. Air tickets fell 10% in its latest quarter. Strength in its hotel room bookings saved the day, but isn't it just a matter of time before the lodging industry begins to do a better job of reaching out directly to travelers the way that airlines have been able to in recent years?
Bulls will argue that Expedia was a cheap company before spinning off TripAdvisor, and that it's even cheaper now. The valuation may seem attractive, but the model is suspect. Hop on a different form of transportation while you still can.
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.
: The gradual fade of traditional travel websites won't be the end of travel-related websites. Folks still want to smoke out deals, and that's where priceline.com's (Nasdaq: TZOO) "name your own price" engine and deal publisher Travelzoo's weekly missives come in. Analysts see revenue at Travelzoo growing 34% in 2011, and earnings climbing more than twice as fast. The model's scalable nature, the introduction of Groupon-like deals, and a turnaround in its European operations that had meaty effective tax rate implications helped deliver unusually robust results. The year ahead should be more indicative, with revenue and earnings growing 18% and 23%, respectively. Travelzoo's a steal at 15 times forward earnings. (Nasdaq: PCLN)
: Investors hungry for a more traditional portal than Priceline need to start looking outside of the country. Expedia's generating 40% of its bookings internationally, but that may not be enough when pure plays are available. China is a good place, early in its growth cycle and years removed from the trends that will undercut Expedia's near-term prospects. It's true that Expedia owns a chunk of China's eLong (Nasdaq: CTRP) , but Ctrip is the undisputed top dog in this space. Ctrip's stock has surrendered more than half of its value since its springtime peak, giving investors an attractive entry point into a company where growth may be slowing but which is clearly still moving in the right direction. (Nasdaq: LONG)
- Google: If Big G is Expedia's biggest headache right now, it may also represent the ideal portfolio replacement. The world's leading search engine has shown its recession-resistant ways, and now it's fetching a mere 15 times forward profit projections. Google is too smart to sit at this point.