Fallen Angel: Travelzoo Inc.
Ralph Bartel, the founder and CEO of Travelzoo Inc. (Nasdaq:TZOO), has been buying up shares of the small-cap online travel publisher hand-over-fist. Time to take a closer look.
Since February, Bartel has scooped up several million dollars worth of Travelzoo stock. Bartel’s buying binge has come during a disappointing series of earnings reports for New York, N.Y.-based Travelzoo, a one-time high flier. At a recent price of $7.99 a share, Travelzoo trades near its 52-week low of $6.45, set in July, and well off its 52-week of $24.97, hit last September.
While it remains to be seen if Bartel is a savvy buyer of Travelzoo shares, he has previously shown a very good knack for knowing when to sell the stock. Bartel was wisely a big seller of Travelzoo shares around the $30 level back in 2006. Even after Bartel’s massive selling of Travelzoo stock two years ago, he still owns an over 60% stake in the now struggling small cap.
Travelzoo’s financial performance has been dragged down by a costly international expansion effort that has yet to pay off. At the same time, Travelzoo’s core domestic business has turned stagnant. Unlike travel companies such as Expedia, Inc. (Nasdaq:EXPE) and Orbitz Worldwide, Inc. (Nasdaq:OWW), Travelzoo doesn’t handle bookings, but rather serves as an aggregator of travel offers from around the Web. In fact, Expedia was one of Travelzoo’s largest advertisers last year. Through a series of websites, e-mail newsletters and alerts, Travelzoo provides information on offers from hundreds of travel companies to more than 12 million users.
For the second quarter ended June 30, Travelzoo reported revenue of $21.8 million, an 8% annual increase. As a result of Travelzoo’s aggressive expansion into Asia Pacific and Europe, this modest growth wasn’t able to overcome its enlarged cost structure. Travelzoo reported a second-quarter loss of $1.2 million, or $0.08 a share, compared with a profit of $2.8 million, or $0.17 a share, a year ago. Income before income taxes was $1.75 million. North American revenue inched up 3% to $19.2 million, while the unit’s operating profit declined to $6.9 million from $7.3 million. Travelzoo exited the quarter with $21 million in cash and no debt.
With the stock down over 40% year to date, Travelzoo’s market capitalization has shrunk to just $114 million. Travelzoo doesn’t provide guidance, but the two analysts that follow the stock expect 2009 revenue of $92 million and EPS of $0.27. Based on these estimates, Travelzoo shares are trading for a little over one times revenue and 29 times earnings. While this valuation still looks steep, Travelzoo’s international losses mask the profitability of its North American unit. If better managed, these assets should be worth $11 a share or more. Unfortunately, given Bartel’s hefty ownership stake, it would be difficult for an outside investor to shake things up.
So far, there has been little indication from Bartel that international losses are likely to end anytime soon or that international units may be shuttered. For Bartel to get this stock working again, he likely needs to show investors he is serious about curbing losses and reinvigorating domestic growth. On a positive note, Travelzoo claims a downturn in the economy has historically been good for its business, as travel providers need more help in filling inventory. Judging by Bartel’s continued insider buying, he seemingly believes that better days are ahead.
Add it all up, and for medium- to higher-risk-oriented investors, Travelzoo looks like a small-cap “fallen angel” situation worth considering on weakness back down to the low-$7 level.
Since February, Bartel has scooped up several million dollars worth of Travelzoo stock. Bartel’s buying binge has come during a disappointing series of earnings reports for New York, N.Y.-based Travelzoo, a one-time high flier. At a recent price of $7.99 a share, Travelzoo trades near its 52-week low of $6.45, set in July, and well off its 52-week of $24.97, hit last September.
While it remains to be seen if Bartel is a savvy buyer of Travelzoo shares, he has previously shown a very good knack for knowing when to sell the stock. Bartel was wisely a big seller of Travelzoo shares around the $30 level back in 2006. Even after Bartel’s massive selling of Travelzoo stock two years ago, he still owns an over 60% stake in the now struggling small cap.
Travelzoo’s financial performance has been dragged down by a costly international expansion effort that has yet to pay off. At the same time, Travelzoo’s core domestic business has turned stagnant. Unlike travel companies such as Expedia, Inc. (Nasdaq:EXPE) and Orbitz Worldwide, Inc. (Nasdaq:OWW), Travelzoo doesn’t handle bookings, but rather serves as an aggregator of travel offers from around the Web. In fact, Expedia was one of Travelzoo’s largest advertisers last year. Through a series of websites, e-mail newsletters and alerts, Travelzoo provides information on offers from hundreds of travel companies to more than 12 million users.
For the second quarter ended June 30, Travelzoo reported revenue of $21.8 million, an 8% annual increase. As a result of Travelzoo’s aggressive expansion into Asia Pacific and Europe, this modest growth wasn’t able to overcome its enlarged cost structure. Travelzoo reported a second-quarter loss of $1.2 million, or $0.08 a share, compared with a profit of $2.8 million, or $0.17 a share, a year ago. Income before income taxes was $1.75 million. North American revenue inched up 3% to $19.2 million, while the unit’s operating profit declined to $6.9 million from $7.3 million. Travelzoo exited the quarter with $21 million in cash and no debt.
With the stock down over 40% year to date, Travelzoo’s market capitalization has shrunk to just $114 million. Travelzoo doesn’t provide guidance, but the two analysts that follow the stock expect 2009 revenue of $92 million and EPS of $0.27. Based on these estimates, Travelzoo shares are trading for a little over one times revenue and 29 times earnings. While this valuation still looks steep, Travelzoo’s international losses mask the profitability of its North American unit. If better managed, these assets should be worth $11 a share or more. Unfortunately, given Bartel’s hefty ownership stake, it would be difficult for an outside investor to shake things up.
So far, there has been little indication from Bartel that international losses are likely to end anytime soon or that international units may be shuttered. For Bartel to get this stock working again, he likely needs to show investors he is serious about curbing losses and reinvigorating domestic growth. On a positive note, Travelzoo claims a downturn in the economy has historically been good for its business, as travel providers need more help in filling inventory. Judging by Bartel’s continued insider buying, he seemingly believes that better days are ahead.
Add it all up, and for medium- to higher-risk-oriented investors, Travelzoo looks like a small-cap “fallen angel” situation worth considering on weakness back down to the low-$7 level.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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