Is This Highflier Due for a Crash?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Travelzoo (Nasdaq: TZOO). Is this publisher of travel and entertainment deals the real thing? Let's get right to the numbers.

Foolish facts

Data current as of Nov. 24.

If Fools don't find Travelzoo to be particularly praiseworthy, it may be because it's difficult to ascertain any sort of competitive advantage. All the company does is publish travel deals and offers. Valuation is also a concern.

"In an industry that is heavily affected by the economy, and I can't follow a 10 [price-to-book ratio] and a 53 [price-to-earnings ratio]. Again, I get burnt on these type of market darling calls often as they are often largely held by institutions which sit on their shares reducing the trading float, but I just can't resist believing that gravity has real life implications at some point," wrote All-Star investor TSIF in September.

The stock is up more than 53% since, possibly because of Yahoo! and Google expressing interest in acquiring Groupon for as much as $4 billion. Groupon aggregates and publishes city-specific deals and collects a fee for its efforts. Think of it as Travelzoo but for neighborhood shopping.

Does that mean Travelzoo is also worth as much as $4 billion? Not necessarily -- and certainly not according to institutional buying patterns. The stock commanded less than $650 million in market cap as of this writing.

Regardless, bulls will say the delta between Groupon's supposed value to an acquirer (i.e., $3 billion to $4 billion) and Travelzoo's present value ($650 million) suggests the latter has significant room to run, irrespective of the objections of our top investors.

The elements of growth

Source: Capital IQ, a division of Standard & Poor's.

Judging by the numbers in this table, they may have a point. Let's review:

• Both revenue and normalized net income growth have accelerated recently, a very good sign for a growth stock. Analysts expect profit to improve an additional 20% a year over the next five.
• Gross margin has remained relatively stable as revenue and profit have improved, another good sign in that it suggests Travelzoo has pricing power.
• Revenue growth has outpaced receivables growth in each of the last two years, a sign of management's efficiency with collecting funds. But this isn't surprising. At 39.3%, return on capital -- another sign of efficiency -- is at its highest level in three years.
• I'd rather not see shares outstanding rise by almost 15% since 2008, but that won't be an issue so long as the profit picture continues to improve as it has.

Competitor and peer checkup

Source: Capital IQ, a division of Standard & Poor's. Data current as of Nov. 24.

On the basis of normalized net income, priceline.com is the big winner in this table. I'm not the least bit surprised. A sustained economic malaise has travelers shopping for bargains now more than ever. That's good for Travelzoo, sure, but priceline's "Negotiator" is a brand name consumers remember and trust -- if only because William Shatner makes us laugh in acting the role of reliable dealmaker.

Grade: Unsustainable
Therein lies my problem with Travelzoo. For as much as I relish the buyout speculation and improving fundamentals, I've yet to identify a clear competitive advantage that makes the stock any more attractive than its similarly priced peers.

Now it's your turn to weigh in. Do you like Travelzoo at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

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