Today's not such a great day to be a shareholder of Orbitz Worldwide (NYSE: OWW), one of the world's largest travel companies with a market capitalization of $836.7 million. Earlier today, after announcing earnings that fell short of Mr. Market's expectations, shares of the travel company fell more than 19%.
Earnings disappointment
For the company's third fiscal quarter of this year, analysts expected it to post earnings per share of $0.13 on revenue of $220.69, down $0.01 from the $0.14 the company reported in the same period a year ago. In regards to the company's revenue report, it exceed expectations with $220.9 million, an increase of 11.4% from the $198.3 million the company reported in the same quarter last year.
The primary driver behind Orbitz's revenue increase can be chalked up to two metrics; room night growth and gross bookings. When looking at the company's room nights, we can actually see that this quarter saw an increase of roughly 22% as an increase in the demand for travel services has risen. When pitted against Expedia (EXPE +1.93%), which saw its room nights for its most recent fiscal quarter increase by 20.2%, one cannot help but to be impressed.
In addition to seeing an increase in room nights, the company also reported that its gross bookings increased by 4.6% from $2.65 billion to $2.77 billion. Year-to-date, the company has seen gross bookings grow by a more modest 2.2% from $8.76 billion to $8.96 billion. Although these metrics appear attractive, Expedia far outpaced it with a rise in gross bookings for the quarter in the amount of 15.2% and a year-to-date increase of 14.8%. This suggests that, while Orbitz is experiencing growth and that its growth has accelerated from the beginning of this year until now, it still has a far way to go before catching up to a competitor like Expedia.
In light of a challenging competitive environment, Orbitz has been hard pressed to stay in the consumer's eyes. This is demonstrated by the company's lower margins that it reported this quarter. For instance, for its third quarter, the company reported an operating margin of 12.4%, a decrease from the 12.6% decrease it reported last year. Though this decline is not drastic, it is a far cry from the 17% operating margin reported by Expedia and the even more attractive 33% reported by priceline.com (PCLN +2.20%) as of its most recent fiscal quarter.
For its three fiscal quarters year-to-date, the company reported an even more unfavorable operating margin of 7.3%, down from the 7.4% it reported over the same time horizon last year. Just as in the case of the company's quarterly operating margin, it falls short of the 29% reported by priceline.com year-to-date, but actually beats out Expedia, which saw its operating margin come in at 6.3% year-to-date due to a $66.5 million charge related to acquisitions, and a $69.3 million increase attributable to legal reserves and higher occupancy taxes.
Balance sheet woes
While it is true that, over the past year, the company has seen a substantial rise in its book value of equity, which has risen from -$142.7 million to a positive $32.8 million, its debt is still a concern. Currently, with $433.1 million in long-term debt, Orbitz has a long-term debt/equity ratio of 13.22. What this means is that, for every dollar in assets after taking away all liabilities, the company has $13.22 in debt that must be paid off eventually. This is far higher than 0.54 long-term debt/equity ratio of Expedia and the 0.29 ratio reported by priceline.com.
As a result of the company's sky-high debt, its margins have also been negatively affected by high burden of interest payments that accompany it. For its most recent quarter, the company recorded interest expense of $11.96 million, an increase of 35.2% from the $8.85 million announced in the same quarter of last year. Comparing it to the company's revenue, we arrive at the conclusion that it is paying about 5.4% of its revenue toward the interest on its debt alone, far higher than Expedia and priceline.com, and slightly higher than the 4.5% the company paid last year.
Foolish takeaway
Based on the analysis provided above, it appears as though the market's lack of enthusiasm about Orbitz is justified. Not only did the company report earnings that fell short of the market's expectations, but its profitability and its financial flexibility (the latter due to its high level of debt) bring into question the long-term viability of the enterprise. For this reason, I personally am staying away from its shares but for the Foolish investor who believes that this underdog has significant upside in the event that it can bolster its margins and gain market share, I believe that its success would yield attractive returns relative to its expensive peers.
