“Skipper. Shouldn’t we tell them that the boat is out of gas?
Nah! Just smile and wave, boys. Smile and wave ”
– Madagascar the Movie
Earlier this week, Reuters reported that travel price comparison site Travelzoo has seen its shares drop over 75% since July of last year and that the company has hired bankers to explore potential “strategic opportunities.”
For a company that weathered the 2000 dot-com bust, has a growing base of 24 million users and a reported $143 million in 2011 revenue, I’m left wondering can the boat really be out of gas?
Well, not if you look at the overall travel market.
According to Benchmark analyst Daniel Kurnos, the hotel industry is viewed as “predominantly favorable, despite ongoing macroeconomic headwinds.” Additionally, recent data from Pegasus Solutions (also included in Benchmark’s report) showed that booking windows continue to lengthen for leisure and business travel, and that passenger load factors and aircraft utilization are reaching pre-recession levels globally. Both of these lead one to conclude that travel demand should improve modestly in 2012 despite elevated oil prices and other economic issues.
So what could possibly be putting so much downward pressure on Travelzoo’s share price? Well, a look back at past earnings history Vis-a-Vis analyst expectations paints a pretty telling story I think.
As the following table shows, Travelzoo had been blowing away the analysts quarter after quarter, racking up an impressive 69% increase against EPS estimates over the five quarters leading up to Q2 2011.
Unfortunately, when the Q2 2011 numbers arrived, Wall Street – rather than averaging the resulting 6 quarters worth of increases (53% on average according to my math) – simply held out for more and started shorting. In my mind, a company posting numbers like this – against a difficult macro-economic backdrop – deserves at least one pass.
Personally, I’m bullish on the travel industry and the price comparison market in general. To wit, according to a recent Forrester Research report, online shoppers in the U.S. will spend approximately $327 billion in 2016, up 45% from $226 billion this year and 62% from $202 billion in 2011. Forrester also states that in 2016, “e-retail will account for 9% of total retail sales, up from 7% in both 2012 and 2011”, representing a compound annual growth rate of 10.1% over this five-year forecast period.
While much of this growth will likely come from online retailers improving their web sites and services, the key factor is that each shopper is expected to spend more on average. Forrester anticipates that in 2016 U.S. consumers will each spend an average of $1,738 online, up 44% from $1,207 in 2012.
You heard me… 44% over the next 4 years!
In my mind, price comparison sites such as Travelzoo and others are likely to benefit handsomely from these increases, which should ultimately be accretive to their public equity. If that ends up being the case, you’ll find me and other like-minded folks standing on the side of the boat…
Smiling and waving…