Come Click With Me!
You're buying tickets on travel sites. Should you be investing in them too?
By Paul R. La Monica

(MONEY Magazine) – In an increasingly do-it-yourself world, more of us are becoming DIY travel agents. Online-travel revenues hit $54 billion last year—a quarter of all industry bookings—with $24 billion of that going through Internet agencies as opposed to airline and hotel websites. What's more, online-agent revenues are expected to grow another 50% by 2009.

That trajectory has launched two moguls—Barry Diller of IAC/InterActiveCorp and Henry Silverman of Cendant—into extreme-moguling mode: Their mini-conglomerates own several online agencies and are now shuffling assets to create stand-alone, publicly traded travel companies. That suggests Diller and Silverman see the chance for higher stock market valuations. IAC's travel operations, including Expedia, "will be best served unleashed and empowered as a stand-alone entity," Diller said in a letter to shareholders.

Indeed, there's a strong case that online travel stocks are undervalued, especially compared with other Web retailers. In addition to IAC and Cendant, the big players are and Sabre Holdings, which owns Travelocity as well as the Sabre reservation technology used by the airlines. All four stocks trade at modest PEG ratios, a measure that looks at the relative cost of a stock by dividing its current price-to-earnings ratio (P/E) by its projected long-term earnings growth rate (G). Amazon, eBay and even lesser shopping sites like eCost trade at PEGs of about 2, while the online travel companies trade at PEGs of 1 to 1.4. Now, none of the Web travel agents have Amazon's leadership status, and earnings growth rates, while healthy, aren't eBay-like, so the stocks should be cheaper. Still, "the discount is probably too great," says Mark Mahaney, an analyst with American Technology Research.

Mahaney's favorite play is (PCLN). No longer a niche site where users set a price they'll pay and hope for a flight close to what they want, Priceline now offers traditional travel options as well. Gross bookings, or the dollar amount of tickets and services purchased, are increasing faster than at its competitors. Earnings are also expected to grow more quickly, at 20% a year.

If you can handle more risk, consider looking outside the U.S. to—where else?—China. Five-year-old (CTRP) is building a brand name in online travel among China's rapidly expanding affluent class. The company buys up blocks of airline tickets and hotel rooms in major Chinese cities, then resells them to leisure and business travelers. The stock, traded on the Nasdaq, carries a high P/E of 33 times 2005 earnings estimates, but projected earnings growth is high too: 38% a year. Ctrip is already profitable, and operating margins were a stellar 43% last quarter. "Ctrip should continue to command a premium valuation to its U.S. peers," says Ashish Thadhani, an analyst with Gilford Securities. "It is growing faster and has unmatched profitability."

There are obvious concerns here. Ctrip is not only young, it's small; sales were just $11.6 million last quarter. But 10 Wall Street analysts cover the stock, so the pros expect the company to reach maturity. Any Internet stock, of course, whether here or in China, carries risks. But this trip could be well worth making.

Taking a Flier on Online Travel

Notes: As of Jan. 19. [1] Based on projected 2005 earnings. [2] Five-year projections. Source: Thomson/Baseline.

PRO: The sector is growing fast, and stocks look undervalued

CON: Competition is fierce, and any Internet business is risky