Orbitz Worldwide: Behind the Curve?

Orbitz.com

Orbitz Worldwide (NYSE: OWW  ) has outperformed its peers in terms of stock appreciation over the past three years. While Orbitz's share price has appreciated 228.2% over this time-frame, The Priceline Group (NASDAQ: PCLN  ) and Expedia (NASDAQ: EXPE  ) have "only" appreciated 146.3% and 211.1%, respectively. This performance might sway some investors, but Foolish investing is about focusing on what's really going on behind the scenes and setting yourself up for the long haul.

Several concerns for Orbitz
In its 10-Q, Orbitz cited several headwinds that could impact its performance. One of these concerns was a relatively high unemployment rate, which would lead to reduced consumer spending. This, in turn, would lead to volatility in the online travel market. The overall perception of the sustainability of the global economy also played a role.

Another big concern is that airlines and hotels are now focusing on distributing their products through their own sites. Expedia also mentioned this on its 10-Q, and Expedia went even further by stating that airlines and hotels are doing this by offering promotions to travelers. But this is only the beginning.

Lagging in metasearch
One big difference between Orbitz and Expedia/Priceline is that Orbitz is behind in metasearch (aggregating search engine and database information so travelers can find the best deals in one place.) After Kayak had a five-year relationship with Expedia, Priceline bought Kayak. Fortunately for Orbitz, it now has access to the metasearch market via TripAdvisor. That's the good news. The bad news is that this isn't an exclusive deal like it had with Kayak. 

Priceline acquired Kayak and Expedia acquired majority ownership in Trivago, and both Kayak and Trivago are metasearch sites. Another potentially ominous sign for Orbitz, as well as its peers, is that Google is becoming increasingly interested in the travel market. 

Increased competition and industry trends
Another factor for Orbitz is that the likelihood of increased competition in the online travel industry will lead to increased marketing spend so it can remain competitive. This primarily relates to the cost to acquire search engine keywords in order to then increase traffic.

Furthermore, Orbitz is behind the curve with another industry trend. Expedia is now offering travelers the option to pay while they book their hotels or upon arrival. This will increase costs for Expedia, but the company feels that it's a necessary risk. Orbitz likely doesn't want to absorb those costs -- credit card fees for hotel bookings and customer service. 

Getting back to air travel, recent mergers have negatively affected online travel companies because they have resulted in reduced capacity. It should also be noted that while higher airfares have helped the online travel market, this is primarily thanks to corporate travel. Historically, leisure travelers don't respond well to higher airfares, and leisure travelers are more important than business travelers to online travel companies.

As if Orbitz doesn't have enough headaches, its suppliers are constantly looking to decrease distribution costs (commissions paid to online travel companies), which could significantly reduce the company's net revenue. This pressure is expected to continue, but Orbitz is confident that its shift toward hotels and dynamic packaging will lead to positive long-term fiscal results. Speaking of fiscal results, let's get to some good news for Orbitz. Yes ... there's actually good news. 

Recent results
Below is a quick glance at gross bookings for Orbitz in the first quarter year over year (bookings pertain to funds expected to be received from customers based on accepted orders or contracts): 

Orbitz

Gross Bookings

Overall

Up 3%

Domestic

Up 2%

International

Up 4%

The domestic performance was due to higher fees and lower volume, whereas the international performance resulted from higher values and volume (excluding air volume) Overall, these are positive numbers. 

Now take a quick look at revenue (year over year):

Orbitz

Net Revenue

Overall

Up 4%

Air

Up 1%

Hotel

Up 7%

Vacation Packages

Up 4%

Advertising and Media

Up 12%

Orbitz has managed to deliver despite increased competition and more demands from suppliers in regards to decreased distribution costs. However, consider another type of chart before you make any investment decisions. The chart below compares the top-line performances of Orbitz, Priceline, and Expedia over the past five years:

EXPE Revenue (TTM) Chart

EXPE Revenue (TTM) data by YCharts

If you look at the chart above and combine that with the fact that Orbitz is trading at 67 times earnings whereas Priceline and Expedia trade at 33 and 32 times earnings, respectively, then you would be hard-pressed to find a strong argument for Orbitz over its peers. 

The Foolish bottom line
Orbitz appears to be a good company, but it's behind the curve in several areas, it's in a sensitive industry, and it's not the best of breed. If you're going to invest in an online travel company, then you might want to consider Priceline first. But keep in mind that this entire industry is volatile. 

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