Should You Follow This Big Investor Into Priceline and Expedia?

Source: Priceline.

Recent regulatory filings show that renowned investor David Tepper, co-founder of Appaloosa Management, bought shares of online travel agencies Priceline Group (NASDAQ: PCLN  ) and Expedia Inc.  (NASDAQ: EXPE  ) during the first quarter. Should you follow Tepper into these high-growth companies?

A great business model
Internet and related technologies are changing a host of different industries, and online travel agencies such as Priceline and Expedia are among the major beneficiaries of this revolution. Efficiency, convenience, and comfort are among the main advantages for consumers, and travel industry operators get access to a big audience of potential customers in a simple and effective way.

Furthermore, online travel agencies allow hotel operators, airlines, and rental car companies to clear their inventory without damaging the brand. Occupation is a key factor for profitability in these industries: The additional cost of one more guest in a hotel room is almost irrelevant, so it makes a lot of sense from a financial point of view to offer steep last-minute discounts if the room is going to otherwise remain empty. The same idea is valid for an unoccupied seat in a plane, or a rental car sitting idle.

But offering aggressive discounts can tarnish a brand, making it difficult to convince clients to pay the regular price if they have become accustomed to big discounts.

Using online travel agencies to offer last-minute deals under special conditions, companies can clear inventory by selling to bargain hunters while at the same time protecting the brand image. Needless to say, clients are more than happy with these kinds of deals, which can be outstandingly cheap.

Impressive performance
Because of its focus on international growth and rock-solid execution, Priceline has delivered higher growth rates than Expedia over time, but both companies are expanding at a rapid rate.

PCLN Revenue (TTM) Chart

PCLN Revenue (TTM) data by YCharts.

Priceline said first-quarter 2014 sales increased by 26% to $1.64 billion. Gross travel bookings -- the total value of travel services purchased on the platform -- came in at $12.35 billion during the quarter, up 34% from the prior year. The business is performing particularly well in the international segment, where bookings increased by 37%.

Growing sales and expanding profit margins provided a double boost to earnings during the quarter: Priceline earnings per share shot up 36% to $7.81, well above the consensus estimate of $6.93 per share.

Expedia announced a first-quarter 2014 increase of 19% in revenues, to $1.2 billion, while gross bookings increased 29% to $12.6 billion. Advertising is a big drag on profitability for Expedia, though, so EBITDA increased only 2% during the quarter.

While Priceline is the clear leader in both growth and profitability, these recent earnings reports show that the online travel industry is generating enough opportunities for the two companies to deliver substantial growth for investors over time.

Foolish takeaway
Investors should never blindly follow the moves of others, even when it comes to a highly successful professionals such as David Tepper. However, there is nothing wrong with analyzing the purchases of smart investors when looking for ideas for your own portfolio, provided you do your own homework before reaching a decision.

Considering their attractive business models and extraordinary growth rates, Priceline and Expedia both look like solid candidates for investors looking to capitalize on the exciting growth opportunities provided by the online travel industry.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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8/28/2015 4:00 PM
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