A cool $7 billion. That's how much
Priceline.com (Nasdaq: PCLN)
has picked up in value during the past three months on the heels of
a stunning +81% gain in the shares. Don't feel bad for rivals
Travelzoo (Nasdaq: TZOO), Expedia (Nasdaq: EXPE)
Orbitz Worldwide (
-- they've risen anywhere from +15% to +40% as well.
In the most recent quarter, Priceline saw a +60% jump in
international bookings and a +20% jump in domestic bookings
compared to a year ago. The other online travel firms had similar
So if things are looking much brighter than a year ago in the world
of business and leisure travel, why have shares of
Avis Budget (
slipped roughly -6% in the past three months? Blame it on a
summer-long saga that has seen these rivals try to win the
Dollar Thrifty (
. Both firms would stand to gain significant synergies by winning
this prize. But the loser would also win, as the whole industry
benefits from fewer rental car outlets and fewer price wars. [Read
my earlier take
on the rental car bidding war
Demand on the rise
Since I wrote my previous article, industry conditions have
improved. Airlines are packing in more passengers and hotel rooms
are getting more full. These are usually key harbingers of demand
for rental cars. But these two rental car firms are trying to take
a sober, quiet stance when discussing industry conditions for fear
that Dollar will suddenly seem to be an even bigger prize as
industry conditions strengthen.
Unfortunately for them, Dollar has spilled the beans, noting in
early August that demand was getting better by the month. Around
Memorial Day, analysts thought Dollar Thrifty would earn around $3
a share this year. Now they think
will be closer to $4. A more sober tone on the conference calls
from Hertz and Avis has led analysts to hold their fire when it
comes to upward
forecast revisions for those two firms. Yet that is likely to set
the stage for an upside
when the two firms report results in late October.
Coming to a head
But investors don't need to wait that long. That's because the
whole saga between these three suitors/rivals will be addressed
next Thursday, September 16th when Dollar Thrifty's shareholders
vote whether to accept Hertz's $41 a share offer. Avis' offer is
for $48 a share, and it is taking aggressive steps to block that
shareholder vote. But since Avis is unwilling to pay a break-up fee
if regulators vote against the deal on anti-trust grounds, Dollar
Thrifty prefers to go with Hertz's lower offer, simply because of a
promised break-up fee.
Of course, Avis may step in and sweeten the offer before next
Thursday. Analysts think the deal still makes sense for either
party if Dollar Thrifty received $60 or even $65 a share. Clearly
though, Hertz would love to see its $41 a share offer win the day,
and has thus far seemed dis-inclined to engage in a real bidding
Unless we get even higher bids that diminish the compelling value
of a deal, I still think both the winner and loser would benefit.
And with shares of both firms trading for about seven times
projected 2011 EBITDA, a sharp sector rally could well ensue once
this drama is resolved.
Shares of Priceline.com trade for about 20 times EBITDA, while
Expedia and Orbitz fetch more than 15 times projected 2011 EBITDA.
All of these companies -- including the car rental firms -- are
subjected to the same industry conditions and should eventually
move in tandem. The online travel firms will always sport a higher
multiple, thanks to their asset-light business models, but the
current valuation gap between these two industries is far too wide.
Action to Take -->
Hertz and Avis are stuck in a holding pattern. Shares of Avis are
slightly more attractive on a
basis, but both companies increasingly look set to post robust
profit growth in the next few years as the global
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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