TZOO - Travelzoo: Bouncing Back With Undervaluation

2023-04-12 09:51:30 ET

Summary

• Travelzoo performed well amidst mixed market conditions.
• Its financial positioning is still in excellent shape after the substantial cash decrease.
• Market prospects are more optimistic despite macroeconomic headwinds.
• TZOO stock price appears to be rebounding after the massive correction in the last two years.

The tourism and hospitality industry suffered from the disruptions brought upon by the pandemic. In over two years, it had to deal with different restriction protocols across regions. Even online advertisers and publications saw a dramatic plunge in their performance. In 2022, a brighter future was expected. Yet, the impact of inflationary headwinds hampered the market potential.

Amidst these hullabaloos, Travelzoo (NASDAQ: TZOO) navigated the stormy market. Its efforts and strategies proved fruitful as revenge travel started. Despite inflation, its operational strategy and the easing of restrictions helped sustain its rebound. Also, it maintained a sound financial positioning that showed its adequacy. The company is still sustainable while covering its borrowings and capital returns.

Meanwhile, the stock price is still at rock bottom. It appears to be bouncing back from its lows in the past two years. Even so, it could be an excellent opportunity to purchase its shares at a discounted price.

Company Performance

It's been almost a year since I last covered Travelzoo. I admit it was a mistake to underestimate the impact of inflation, particularly on fuel prices. Despite this, the company withstood its impact in the second half. It saw massive challenges along the way, but it remained durable. It also proved to be resilient as it bounced back from the 3Q plunge.

Its operating revenue amounted to $70.6 million , a 13% year-over-year growth. It was also 67% of the 2019 revenue and has shown consistent revenue growth since 2022. Indeed, the easing of restrictions stimulated revenge travel. Although these two factors were more behavioral, we could still quantify this. In a survey, almost half of travelers opted to use online booking and advertisement websites. Being at home for too long, change in scenery, quality time with family, and relaxation were their primary motivation. In the quarterly values, the impact of inflation was most visible in 3Q 2022 as revenues dropped. Yet, it was still higher than the same quarter in 2021. The fourth quarter revenue proved the resilience of TZOO as revenue rose to $18.6 million. It was also the highest quarterly value in the last three years. Aside from the pent-up demand for travel, the decreasing inflation raised most travelers' purchasing power. We can also attribute it to other surprising factors.

First, the labor market transformation allowed more entrepreneurs and employees to travel. In a survey, only 50% of respondents had remote work flexibility at varying levels. But about two-thirds of respondents were traveling more often due to it. The same survey revealed that more people increased their travel duration by over 20%. Second, the impact of boarded reopenings across regions and revenge travel still played a vital role. It allowed more people to travel amidst the influx of domestic and international passengers. Despite the inflation, travelers decided to change their itineraries to maximize their travel budget. Third, the pricing strategy of the company worked to cushion the blow of inflation. In its quarterly presentations, the number of TZOO members was flat at 30.7 million in the first half. But it decreased to 30.5 million in 3Q and 30.4 million in 4Q. Even so, it was still higher than in 4Q with 30.3 million. We may attribute it to seasonality changes. What matters is that the operating revenue stayed stable and bounced back.

Even better, Travelzoo remained an efficient company amidst the higher prices and lower members. Costs and expenses remained stable. Their movements were proportionate to that of revenues. The company was still viable at 11%, a substantial increase from 2020 and 2021. Also, its 4Q operating margin reached 19% the highest in the last five quarters. Indeed, the company can withstand more headwinds, given its operational flexibility. The combination of its pricing strategy and efficiency worked well to stabilize its growth. It also succeeded in balancing revenue growth, operating capacity, and margins.

This year, TZOO may see more fruitful results. It already has a grasp of its pricing strategy to handle inflation better. Also, the decreasing inflation may entice more members and stabilize costs and expenses. At 6%, inflation is now 34% lower than the 2022 peak. More factors may help cushion headwinds and sustain the performance, which will be discussed in the next section.

Why Travelzoo May Remain A Solid Company This Year

Travelzoo remained unfazed amidst inflationary headwinds. It was still a solid company with sustained revenue growth and expanding margins. Even better, inflation is more manageable today, given the continued decrease. Travelers may expect higher fares and accommodation fees as Spring and Summer approach. But with more stable prices of goods and services, travelers have better flexibility today. Over 80% of Americans plan to spend either the same or a higher amount on travel this year. A recent study shows that international travel bookings for Spring are 30% higher than in 2022. Many of these traveling families are having multigenerational vacations. About 40% of US adults travel with families of three generations.

Moreover, the preference for hybrid work setups in the US may contribute to the continued hype in travel. It is now prevalent among business owners, with 80% of companies planning to shift to this work setup. Over 70% of employees believe this setup may help improve their overall well-being. This labor market trend may help spur the boom in travel and tourism. Meanwhile, average gasoline prices per gallon are 30% lower than the 2022 peak. Its positive spillovers may be more evident to those planning to take a domestic trip. It is especially advantageous to those with their cars.

All these are just some of the driving forces in the industry. But what makes Travelzoo a solid company is its adequate financial capacity. Cash can still cover borrowings despite the over 50% cut. After all, it was used to cover outstanding vouchers. Accounts payables and other liabilities are also way lower than their value in 4Q 2022. Meanwhile, the percentage of cash reserves to total assets is 25%, making TZOO a very liquid company. TZOO can sustain its current capacity while paying borrowings and capital returns. It can withstand more headwinds while balancing growth with viability and sustainability.

Stock Price

The stock price of Travelzoo has been in a continued downtrend for the past two years. The stock price correction has been massive, cutting the value by half. At $5.97, the stock price is only 2% lower than last year's value. But it has already been cut by two-thirds from the pre-correction price in 2021. Despite this, it can be a perfect chance for investors who wish to buy its shares at a discount. One can prove it using the PB Ratio, given the current BVPS of 0.56 and PB Ratio of 13x. If we use the current BVPS and the average PB Ratio of 23x, the stock price will be $13.44. To assess the stock price better, we will use the DCF Model.

FCFF $8,480,000

Cash $18,690,000

Borrowings $11,130,000

Perpetual Growth Rate 4.8%

WACC 9.2%

Common Shares Outstanding 15,704,000

Stock Price $5.97

Derived Value $12.09

The derived value confirms the undervaluation of the stock price. There may be a 102% increase in the stock price in the next 12-18 months. So, potential investors may consider it a reasonable price to buy shares.

Bottomline

Travelzoo is still a solid company amidst the disruptions in the past three years. It maintained well-balanced revenues and margins. Now, market prospects are inviting. As such, its performance may further improve this year. The decreasing inflation, changing work environment, and pent-up travel demand may become primary driving forces. More importantly, it has adequate resources to increase its operating capacity. It remains a sustainable company with adequate cash reserves to cover borrowings and capital returns. Even better, the stock price has a high undervaluation and may bounce back. It is logical due to its solid fundamentals and market opportunities. The recommendation is that Travelzoo is a buy.

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