After being downgraded by Goldman Sachs from neutral to sell, Orbitz Worldwide (NYSE:OWW)shares fell 9% to close at $8.13. With the stock now trading at a 39% discount to its 52-week high -- but well above its 52-week low -- investors are likely wondering what to do.
Facing an uncertain future and fierce competition from the likes of priceline.com (NASDAQ:BKNG) and Expedia (NASDAQ:EXPE), is Orbitz still an attractive opportunity at this point? Should investors instead run for the hills?
Orbitz has had an alright run, but it's been far from great!
Over the past five years, Orbitz has managed to generate some revenue growth. It was also successful at converting a net loss into a net gain. Between 2009 and 2013, revenue rose 15% from $737.6 million to $847 million. Most of these gains occurred between 2012 and 2013 and were attributed to an increase in volume and revenue per room night charged.
In terms of profits, the company's performance was even better but still far from ideal. During the past five years, Orbitz saw its net income swing from a loss of $337 million to a gain of $165.1 million. Despite having core costs rise in relation to sales, the company booked fewer impairment charges in 2013 versus 2009; it also benefited from a $165 million tax benefit in 2013. Excluding these elements, Orbitz's bottom line would have grown from -$5.4 million to $100,000.
Its peers have done significantly better!
For the investor trying to grasp the opportunity in the online travel business, looking at Orbitz can be misleading. While the company has been mired by mediocre revenue growth and profitability that is -- at best -- breakeven, rivals like Priceline and Expedia have fared much better.
Over the past five years, for instance, Expedia saw its revenue climb 61% from $3 billion to $4.8 billion. This was due, in part, to an increase in sales resulting from acquisitions. But it was also attributable to a rise in volume experienced over time. Priceline did even better over this period. Between 2009 and 2013, the company's top line expanded by a whopping 191% from $2.3 billion to $6.8 billion, effectively leaving Expedia and Orbitz in the dust.
In terms of profitability, Priceline continued its strong performance during the time frame, demonstrated by a 287% increase in net income from $489.5 million in 2009 to $1.9 billion in 2013. Performance was largely due to the company's revenue growth but was also chalked up to its cost of revenue declining from 46.1% of sales to 15.9%.
Unfortunately, Expedia wasn't so lucky. During the past five years, the company's net income decreased 22% from $299.5 million to $232.9 million, even in spite of attractive top-line growth. This drop stemmed from its core costs rising, primarily its selling, general, and administrative expenses; SG&A rose form 44.6% of sales to 66%, as management allocated more capital to attracting customers.
Based on the data provided, it looks as though Goldman Sachs may have been right to downgrade Orbitz. Yes, the company has seen some modest improvements in its top and bottom lines, but its past performance paled in comparison to Priceline's over the same period. Moving forward, it's difficult to tell which business will deliver the highest returns to shareholders. But if the past is any indication, it looks highly likely that the best prospect is Priceline while Expedia and Orbitz play second fiddle.
Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.