Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Travelzoo (Nasdaq: TZOO ) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Travelzoo meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Travelzoo’s earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author’s calculations.
Travelzoo’s earnings and free cash flow have fluctuated pretty significantly during the financial crisis, but both appear to have rebounded well.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company
|
Debt-to-Equity
|
Return on Equity (LTM)
|
Return on Equity (5-year average)
|
|
Travelzoo
|
0%
|
(4%)
|
33%
|
|
priceline.com (Nasdaq: PCLN )
|
32%
|
37%
|
32%
|
|
Expedia (Nasdaq: EXPE )
|
59%
|
16%
|
(6%)
|
|
Ctrip.com (Nasdaq: CTRP )
|
0%
|
20%
|
27%
|
Source: Capital IQ, a division of Standard & Poor's.
Travelzoo generates high returns on equity with no debt. (The negative return on equity over the past year was due to a large one-time settlement with Delaware.)
3. Management
CEO Chris Loughlin has been at the job for about a year. In the prior decade, he helped to run the company’s European operations and business development in different roles. He’s also co-founded various Internet startups.
4. Business
Having disrupted travel agencies, Internet travel booking isn’t at the moment especially susceptible to technological disruption, though the industry can change rapidly.
The Foolish conclusion
Whether or not Buffett would buy shares of Travelzoo, we’ve learned that, while the company exhibits some of the characteristics of a quintessential Buffett investment: high returns on equity with limited or no debt and mostly consistent earnings, though Buffett might be wary of Travelzoo’s industry and want to watch to see how its new CEO handles the company.
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