They've finally unlocked the cages at Travelzoo (NASDAQ:TZOO). After a rewarding 2004 run led to a disastrous plunge in 2005, shares of the travel-deals publisher regained their swagger yesterday.
The company -- which puts out the weekly Travelzoo Top 20 email of sponsored travel bargains -- saw its stock shoot up 50% after a huge March quarter. Revenue clocked in at $16.9 million, 51% higher than last year's first-quarter showing. Earnings per share soared 140% higher to hit $0.24 a share, though the market was expecting earnings to hit only the mid-teens.
Travelzoo's secret lies in its simplicity. Most folks associate travel sites with full-service portals like Expedia (NASDAQ:EXPE), Cendant's (NYSE:CD) Orbitz, or Sabre's (NYSE:TSG) Travelocity. Those outfits rely on their booking engines and travel-related inventories. They're constantly challenged by price comparison sites and folks who book directly with the providers.
Travelzoo doesn't have to worry about all that. It just lines up advertisers looking to move some last-minute availability, and out goes the list of 20 vacation deals. That's why the company is able to generate gross margins of a whopping 98.4%. Even after Travelzoo's marketing and administrative expense-line items -- as a well as a huge 43.6% tax bite -- the company was able to produce net income margins of 24.3%.
It's an admirable business -- and a viral one. Earlier this month, the company claimed the 10 millionth subscriber to its free weekly email service. More readers translate into more exposure for the 20 weekly advertisers, who will in turn pay Travelzoo more for the greater broadcasting breadth.
I have always worried about Travelzoo's moat. I figured the traditional travel portals, or even some of the more eclectic ones like Hotwire or Priceline (NASDAQ:PCLN), would dive right in. Maybe they have. Who knows? Who cares? None of them is likely to catch up to the 10 million opt-in subscribers that Travelzoo has amassed over the past few years. As simple as Travelzoo's business seems, it's actually a pretty defensible position.
Yes -- dare I say it? -- Travelzoo may actually be what we in Fooldom call a Rule Breaker. Inspired by David Gardner's real-money Rule Breakers Portfolio in the 1990s, the Motley Fool Rule Breakers newsletter service seeks out ultimate growth stocks early in their cycles of conventional defiance. Later today, the new monthly issue will reach subscribers with two recommendations for May. No, Travelzoo isn't likely to make the cut this time, but another healthy quarter or two could have this simple business taking investors to some interesting places.
If you want to check out all of the past picks as well as today's new issue, you can become a subscriber or try a free 30-day trial subscription to see if it's right for you.
Cendant is a Motley Fool Inside Value selection. Priceline is a Motley Fool Stock Advisor pick.
Longtime Fool contributor Rick Munarriz has been inspired by a deal or two on the Travelzoo Top 20 list, but he does not own shares in any of the companies mentioned in this story. T he Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
