Animal Spirits Propel Travelzoo

05/16/2011 12:46 pm EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

The fast-growing travel deals publisher is trading at a tempting discount to the highs hit in the wake of its strong recent report, writes Ian Wyatt of Small Cap Investor PRO .

A good earnings report will go a long way toward improving a company's standing with investors. Take Travelzoo (TZOO), for instance. After its earnings announcement last month, the stock soared 28%.

Some sanity has returned following that pop, however, and Travelzoo shares are again trading near $70, which was a new high six weeks ago.

Considering the 12-month analyst consensus price target is $97.80, the pullback puts shares in a reasonable trading range right now. This is a good place for potential investors to look at buying shares.

Often, a stock's price will run before the company issues earnings—then run further if investors like the results. When the stock gets ahead of itself, like Travelzoo's recently did, it will sell off. But the potential has been marked on the chart, and good companies that follow through with continued performance often see their stocks trade back to the recent highs.

Travelzoo is not your typical online travel service. Unlike Priceline (PCLN), Expedia (EXPE), or Orbitz (OWW), it doesn't use much television advertising to market itself. [In fact, Travelzoo is just launching its first TV ad blitz—Editor.]

Founded in 1998 by Chairman Ralph Bartel, Travelzoo calls itself "a global Internet media company." It supplies information on travel and entertainment deals that are researched and selected by its staff through e-mail newsletters and Web sites. The company also has licensed the Travelzoo name for use in Asian markets, including China. Revenue is generated through advertising fees.

Travelzoo, which has a market cap of $1.2 billion, is a little more like Groupon than high-roller Priceline—a stock trading north of $500 a share right now. And unlike its competitors, it's not caught up in a battle royal with American Airlines parent AMR (AMR)—like Orbitz is, and like Expedia was.
 
More than 2,000 companies currently use Travelzoo services, including American and United (UAL) airlines, Avis Budget Group (CAR) and Royal Caribbean Cruises (RCL).

Travelzoo had a unique launch back in the dot-com boom years. Bartel set up a corporation in the Bahamas and then issued 5.2 million shares to some 700,000 "Netsurfer stockholders" for no cash consideration.

Travelzoo Inc. was subsequently established in 2001, and 11.3 million of the Netsurfer shares were exchanged for those of the new entity (there are currently 16.5 million shares outstanding, with the founder controlling 10 million.)

What excited investors in the recent first-quarter report was a 30% increase in revenue, to $37 million. Before a one-time charge, adjusted net income was $6 million, or 37 cents per share—more than double the 15 cents per share in the year-ago period.

Have Deals, Will Travel
Travelzoo reported that its Local Deals business doubled in the current 48 worldwide markets, producing $16.2 million in revenue. The company says its deals business has the potential to generate $780 million annually (issuing just two deals a week) if it reaches the 30-million-subscriber level in 200 global markets.

That's a lofty goal, but continued progress toward it would almost certainly move the stock above its recent highs.

During the first quarter, Travelzoo announced that it has achieved two notable subscriber plateaus—22 million worldwide, and 5 million in Europe. More than a third of its subscribers are now outside the US, and business grew 23% in North America and 53% in Europe.
 
Based on expected 2012 earnings per share of $1.70, Travelzoo does trade with a high forward price/earnings ratio of around 41. But if you're in the market for a stock that's now trading 30% below its recent high and has the potential to make higher highs, Travelzoo might be one worth considering.

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