Relative valuation is a pretty simple concept, really. Companies that provide similar services with similar competence ought to be valued similarly. If one is larger than the other, it most likely will command a higher market capitalization. If one is growing faster, the same will be true. Overreliance on such measures can be suicidal. I still remember the screamfests that took place over whether CMGI or Internet Capital Group was overvalued in 1999 as compared with the other. Derrrrrrr, they both were overvalued, by a metric ton.
Still, relative valuation within an industry can be instructive. So the news that Cendant
Let's make some comparisons, rough ones.
Current enterprise value (market cap + long-term debt - cash):
Orbitz: $1.082 billion (based upon the $1.25 billion purchase price)
Travelzoo: $945 million
Trailing 12 month (TTM) revenues:
Orbitz: $280 million
Travelzoo: $23 million
Price/free cash flow per share (TTM):
Orbitz: 12.7 (based upon purchase)
Free cash flow growth per share (TTM):
For a company that has a similar enterprise value to Orbitz (post takeover premium, mind you), by even these basic measures Travelzoo is clearly phenomenally more expensive. For there to be such a discrepancy between two companies, some reason that one's future is so much sweeter than the other's would have to be apparent. Travelzoo's growing its top line faster, but not its free cash flow. Naturally -- and here's why relative valuations should not be relied upon too heavily -- companies aren't valued on where they've been, they're valued on where they're going. Travelzoo really actually could have retina-burning future potential. For the life of me, while I think this is at its root a good little company, I just don't see it.
On the other hand, there may be a hope among Travelzoo investors that Cendant's purchase of Orbitz puts Travelzoo in the sights of some other company that wants a foot in the sector. It's possible, but who? Yahoo!
On the most recent occasion that I wrote on Travelzoo, I received a nose full of emails from snarfy trader types saying that the fact that it had continued to go up was proof positive that I was wrong. Quatsch. The market will do what it will do over the short term. But I have full faith that it will always do what it should do. What I do not know, and nor does anyone else, is when. The assumptions that are built into Travelzoo's market capitalization are astounding, and the chances of this being anything but the speculator's version of the game "Chicken" is extremely small.
Bill Mann has no beneficial interest in any company mentioned in this story.