Why Did Travelzoo’s Stock Grow Despite Only Modest Revenue Growth?

Travelzoo’s stock (NASDAQ: TZOO) gained over 80% of its value since the end of 2017 through 2019, with the stock price growing from $6 to $11. But how did the company pull off such gains, as its revenues grew only 5% during this period? Well, there is a valid reason, of course. As it turns out, one of the main reasons was the net earnings margins (profits as a percent of revenues), expanded 220 bps from 1.5% in 2017 to 3.7% in 2019, driven by the company’s focus to reduce its operating ratio, which declined from 83.6% in 2017 to 80.8% in 2019. Our interactive dashboard Why Is There A Mismatch In The Rate At Which Travelzoo’s Revenues And Stock Price Have Changed? gives a detailed picture of how stock and revenue moved for the company over recent years.

The expansion in Travelzoo’s margins was brought about by a 7% decline in the company’s general and administrative expenses, due to a decrease in professional service expenses. General and administrative expenses consist primarily of salary and related expenses for administrative and executive staff, fees for professional services, rent, bad debt expense, amortization of intangible assets, and general office expense.

The modest growth in Travelzoo Revenues can be attributed to an increase in revenues in its North America (61% revenue contribution as of 2019) and Europe divisions, offset by a decrease in its Asia Pacific region (6% contribution). After years of losing money in the Asia Pacific, Travelzoo announced its exit from this region in March 2020. The company reacquired its Asia Pacific operations in 2015 but failed to grow revenues and achieve profitability in the region. In 2019, Travelzoo’s revenues grew 1% y-0-y and 2% y-o-y in North America and Europe, respectively, but saw a 17% decline in its Asia Pacific business. To add to this, the company’s operating profit also reached $17 million in the core business of North America and Europe in 2019 but witnessed an operating loss of $7.5 million in the Asia Pacific, which reduced Travelzoo’s global operating profit down to $9.5 million.

Overall, the margins going from 1.5% to 3.7% coupled with an 8% decline in shares outstanding, and revenues growing modestly by 5%, have meant that the earnings per share grew a robust 185% (off a low base) from about 12 cents per share in 2017 to 35 cents in 2019.

Finally, the contraction of the P/E Multiple from 52x to 31x between 2017 and 2019 – partly offset the earnings growth. This could likely be due to the market getting skeptical about the company’s future performance due to increasing competitive pressures. Further, Travelzoo’s P/E contracted to about 16x currently, as the Covid-19 crisis significantly impacted the online travel industry. Consequently, the travel deal site stock further declined by 47% in 2020 to $6 (as of June 30th). The company’s revenues declined 30% year-over-year (y-o-y) in Q1 and earnings per share was ($0.32), down from $0.41 in the prior-year period. The company has been largely hit, as it derives a majority of its revenues from the U.S. – which has recorded the largest number of Covid-19 cases across the globe.

While Travelzoo’s stock doesn’t have much near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

Also, see how much Travelzoo can gain post-Covid once fears surrounding the coronavirus outbreak subside.

In addition, our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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