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Travelzoo Faces a Long Road Ahead

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Is Travelzoo (NASDAQ: TZOO  ) a better bang for you buck when it comes to web-based travel agents? The company is a fraction of the size of peers such as Priceline (NASDAQ: PCLN  ) or the recently bought-out Kayak Software, and it holds far more attractive valuation metrics. But with a more narrow scope and up against better-funded, behemoth competitors, is Travelzoo a company that investors can own long term with peace of mind? With recent earnings in mind, let's take a look at the company and the competition, and determine the best place to put your investment.

Recent numbers
Though throngs of people take to the Internet daily to research and book their travel ambitions, Travelzoo's recent earnings figures don't show much growth. In fact, the company's North American segment saw its business drop off by about 3%. Europe is saving the day for the company and now represents 40% of its sales. Still, overall subscriber counts grew 4% to 23.3 million people.

All in all, the quarter saw revenues tick up 1%, operating profit grow 3%, and adjusted EPS decline from $0.24 to $0.21.

Perhaps the weaker valuation is justified, as Travelzoo appears to be in the doldrums.

Tough times
As recently noted by fellow Fool Brian Nichols, Travelzoo operates in a segment dominated by industry behemoth Priceline. The company is set to continue its massive growth, with earnings forecasted to be up 28.6% in the current year, and another 23.5% next year. Priceline has best-in-class margins.

Mentioned above, Travelzoo isn't quite in the general travel booking space—it's a deals website that aggregates enticing offers for airfare, hotels, cruises, and more. Still, this is an industry that is averaging double-digit growth, and Travelzoo isn't seeing anywhere close.

Management mentioned that its search properties, SuperSearch and, are underperforming assets that may soon be merged or (better yet) shut down. While this would lower the already extremely anemic top line, the company could find better use for the associated capital.

The problem for Travelzoo is simply competition. Everybody loves to find a great deal on his or her vacations, but there are plenty of options out there. Priceline is finding customers in every nook and cranny, and even the previously poor-performing Expedia has returned to a decent level of growth. To be competitive, Travelzoo is going to have to invest a ton of money into product development and marketing. The company has $66 million in cash and could lever up if need be, but it still wouldn't compare to the industry giants. Without a defensible niche to isolate itself from Priceline, Orbitz, Expedia, and Kayak, the company just doesn't have attractive long-term fundamentals.

Too cheap to pass up?
Travelzoo is a bargain (16.5 times forward earnings) when blindly compared to Priceline (22.7 times) and slightly more attractive than Expedia (18 times). But the company's earnings potential is so limited that Priceline actually looks like a better deal even with its richer pricing.

At a true bargain price, Travelzoo's asset-light business could be attractive. If management can carve out its own piece of the Internet and keep out the giants, today's pricing isn't too bad, either. But with discouraging prospects and a seemingly fair value, the company isn't a buy today.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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