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) and Orbitz Worldwide (NYSE: OWW) -- 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 bullish results.
So if things are looking much brighter than a year ago in the world of business and leisure travel, why have shares of Hertz (NYSE: HTZ) and Avis Budget (NYSE: CAR) slipped roughly -6% in the past three months? Blame it on a summer-long saga that has seen these rivals try to win the affection of Dollar Thrifty (NYSE: DTG). 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 EPS 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 earnings forecast revisions for those two firms. Yet that is likely to set the stage for an upside earnings surprise 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 war.
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 P/E basis, but both companies increasingly look set to post robust profit growth in the next few years as the global economy rebounds.