Has the Online Travel Sector Gotten a Little Pricey?

There is no question that more people all over the world are turning to the Internet when planning their travel. There are several options for investors to play this trend. The world leader in online travel, Priceline.com (NASDAQ: PCLN  ) is a phenomenal choice in every way except one: Shares are getting pretty expensive. Do the main alternatives, Expedia (NASDAQ: EXPE  ) and Orbitz (NYSE: OWW  ) , offer better value, or is it worth paying the premium to jump into Priceline?

The champion
Priceline is the largest online travel company in the world, and by a large margin. Priceline is almost 10 times the size of its nearest competitor, and seems to keep going up. Priceline shares have increased fivefold in the past three years, and have risen from below $7 in 2003 to more than $1050 today. While this is all well and good for William Shatner, is there still time for investors like us to jump in?

What most U.S. investors don't realize is that international business -- mostly Europe -- makes up the vast majority of Priceline's income. In fact, in 2012, 92% of Priceline's operating income resulted from international bookings. Through acquisitions, Priceline has made no secret of its intentions to replicate its European success in Asia. With an even larger target population, if Priceline is successful in this venture, there is certainly a great deal of growth potential.

The question is whether or not that potential is already accounted for in Priceline's share price. At almost 35 times the last 12 month's earnings, the instinctual answer is "yes."  Priceline is expected to earn $40.09 per share for the current fiscal year, rising to $49.34 and $59.24 in 2014 and 2015, respectively. This is very impressive, but not quite impressive enough to warrant such a high valuation. 

Also worth considering is that at Priceline's large size, a growth slowdown becomes more likely. This is already evident in the projections. This year's earnings are expected to be 28% higher than last year, followed by 24% and 20% for the next two years.

Cheaper, but for a reason?
In direct contrast to Priceline, Expedia's shares have not performed quite so well. A bad quarterly report in July caused shares to plummet by about 25%, where they remain.

The problem with Expedia is that unlike Priceline, the company has a lack of diversity, both in terms of its business operations and the geographical makeup of its revenue stream. While Expedia has made some progress in expanding into China, its efforts have yet to impact the company's bottom line.

Even so, Expedia's earnings growth is looking pretty good. Earnings are expected to grow by about 16% annually over the next two years, and shares trade for 28 times earnings right now. When taking into account Expedia's substantial net cash position of more than $700 million -- a lot for a company of this size -- shares do look pretty reasonably valued. Still, iInvestors may want to wait to see what happens at the company's next report before jumping in.

Does the little guy have some value here?
Orbitz is by far the smallest of the three companies, with a market cap of less than $1 billion. It is also the most speculative of the three. Although the company is projected to be profitable for the next several years, earnings have been very shaky, with Orbitz barely squeezing out a profit over the last few years. 

Even the analysts who cover Orbitz don't seem to have much of an idea of what to expect. Earnings projections for next year range from $0.06 per share to $0.57 per share, an enormous range. In other words, Orbitz could be trading for anywhere from 15.6 to 147 times forward earnings -- way too wide of a range for comfort.

Conclusion
While the online travel business seems like it's getting a bit expensive -- just like most of the market -- these are good businesses that should have bright futures ahead of them. While Orbitz is simply too speculative, either of the other two would be worth monitoring to see if they pull back a little bit.

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