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Opportunities from the Euro Zone: Pasta for Tourists
Posted by: Gordon Pape (IP Logged)
Date: October 22, 2012 11:52AM
Contributing editor Glenn Rogers has been off touring in Europe and although he and his family had a great time, he did not like the economic scene at all. Nonetheless, he thinks Europe's woes offer an investment opportunity. Here is his report. Glenn Rogers writes:
I recently returned from a month-long trip to Italy where my wife and I settled my eldest daughter into school in Rome and took the opportunity to travel around the country. I also did some business, looking at a company a partner and I are planning to buy.
I hadn't spent much time in Europe since our year-long sailing trip over a decade ago and things have certainly changed since then - and not for the better, I'm afraid. During the entire trip, I did not see one construction crane anywhere and we visited several of Italy's major cities.
There were millions of tourists, though, and it gradually dawned on me that Italy and many other parts of Europe have devolved into a giant Euro Disney with very nice people serving plates of excellent pasta to thousands of retirees. Now all that pasta gobbled down by aging Americans, along with some Germans and Brits, does help employ some people at low wages and attracts foreign currency, but it is hardly a recipe for economic growth.
Everyone we spoke to under the age of 30 was hoping to get out and move to the U.S. or Canada because they could see no future in their own country. It's true that Italy has been losing its most ambitious people for generations, but there is no doubt that today's youth are even more anxious to leave. If this is how things are in Italy, you can imagine what it must be like in Spain and Greece.
There doesn't appear to be any political will to make the structural changes necessary to regain some degree of competitiveness, such as tax-free corporate zones and less restrictive labor rules. For instance, in Italy there must be one union rep for every 15 workers so in a decent-sized factory, there are scores of people who are essentially paid to slow things down and cause trouble for management. I came home determined to short the euro until it gets to par with the dollar but that's not the topic I wanted to look at this month.
Despite all the euro woes, there is definitely a lot of tourism action, and the fall of the euro against the U.S. and Canadian dollars has stimulated this by making prices more attractive. The hotels are busy, the planes and trains are full, and the various major sites are literally teeming with tourists. And "teeming" is the right word. There are hordes of tourists everywhere and many of them are booking their own travel and looking for restaurants, flights and hotels online. We were among them. So I thought it would be interesting to look at the major travel sites and see if any of them offer a good investment opportunity at this stage.
Because there are plenty of publicly traded travel websites, I'll focus only on a couple we found useful: TripAdvisor (TRIP), which was spun off by Expedia earlier this year, and KYAK (KYAK), which had an impressive IPO his summer and is up 12% since then. We also used booking.com which is owned by priceline.com (PCLN) and to a lesser extent Expedia (EXPE) and Orbitz Worldwide (OWW). The share prices of all these stocks recently pulled back when Priceline and Expedia announced that earnings going forward would be negatively impacted by the poor economic outlook in Europe, which ties in nicely with what I was expressing in my introduction.
Investment merits aside, the site I turned to most often was TripAdvisor, which has built a barrier to entry since it started early by attracting user reviews similar to what Yelp.com (YELP) has done in the restaurant space. TripAdvisor now has a very large recommendation base of over 75 million in hotels, restaurants, things to do, etc.
There are some aspects of the site that I don't like, however. For instance, if a hotel is full they don't show you similar hotels that are available, unlike booking.com which does an excellent job of helping you to find alternative accommodation in your price range. Also, for social networking fans, you can't check in on TripAdvisor as you can with Facebook and Yelp, which should be easy to fix. Despite these shortcomings, I found myself going back to the site often.
TripAdvisor just announced that they have acquired Wanderfly to beef up their social networking capabilities and the stock responded well to the news.
Second-quarter financial results showed the company generating record quarterly revenue of $197.1 million, up 16% from the same period in 2011. Of this, $151.1 million (77% of the total) came from click-based advertising (all dollar figures in U.S. currency).
Net income was $53 million ($0.37 per share, fully diluted). This was down 2% from the previous year but was a 10% quarter-over-quarter improvement.
Adjusted EBITDA for the quarter increased 5% year over year to $96.9 million, or 49% of revenue. Free cash flow was $55.8 million, or 28% of revenue, up 1% year over year.
"TripAdvisor posted record revenue and Adjusted EBITDA results in the second quarter," said CEO Steve Kaufer. "With more than 75 million reviews and opinions, 56 million unique monthly visitors, 32 million marketable members, and 22 million mobile app downloads, TripAdvisor's global community is strong and growing. Travelers are increasingly looking to TripAdvisor to help them plan and take the perfect trip."
That last comment is self-promoting bumph, of course. But it happens to be true.
Another popular travel site, Travel Zoo (NDQ: TZOO) just took a big hit, dropping nearly 15% when they warned on their third-quarter earnings and announced that they are in negotiations to buy a booking site. The market was unimpressed by this news. The point: these travel website stocks are volatile, so they are only for risk-tolerant investors.
More conservative investors will want to look at the hotel chains like Marriot International Inc. (MAR) or Starwood Hotels (HOT). They are less volatile and will also benefit from an improving economy for their business travel customers as well leisure travelers who want to stay in the more expensive but familiar and safe choices that these big chains offer. The best performing stock of this group has been Wyndham Worldwide Corp. (WYN), which has nearly doubled in the past year.
One group I generally avoid is airlines. Their stocks seem to perennially disappoint, and this is generally a marginal business with high capital costs, higher labor costs and even higher fuel costs. I'm not saying you can't trade these and make some money, but you have to be very nimble and take your profits quickly since they will likely be short-lived. The planes are full these days and if you must own a U.S. airline stock, Southwest (LUV) and Jet Blue (JBLU) are the ones to consider.
Action now: Buy TripAdvisor with a target of $40. The shares closed on Friday at $29.93.
Stocks Discussed: TRIP, KYAK, EXPE, OWW, YELP, HOT, WYN, LUV, JBLU,