July 25, 2012 - 1:40pm EST by
2012 2013
Price: 20.30 EPS $1.65 $1.90
Shares Out. (in M): 16 P/E 12.3x 10.6x
Market Cap (in $M): 324 P/FCF 12.3x 10.6x
Net Debt (in $M): -40 EBIT 40 45
TEV (in $M): 284 TEV/EBIT 7.0x 6.3x

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  • Potential Sale
  • excess cash
  • FCF yield


This writeup will be short and sweet.  To learn more about the business please read the old TZOO thread and post.
I believe TZOO is an excellent investment right now because it is cheap and it will be sold.   
In April, Reuters reported Travelzoo was hiring a banker to sell itself.

(Reuters) - Travelzoo Inc, a publisher of travel newsletters and websites that has seen its shares plunge 75 percent since July last year, is planning to sell itself, three people familiar with the matter said.

 The New York-based Internet company, which provides travel deals on flights, hotels, vacation packages and cruises, is in the process of hiring a financial adviser, the sources said. The company has a market value of $336.1 million.
Travelzoo's move comes after it received takeover interest from private equity firms and trade buyers, the sources said.
A few days later, on the Q1 conference call, the CEO was asked about this article:

Dan Kurnos - Benchmark Company

Chris, let me just start-off by asking, is there any truth to that you are seeking advisor to explore strategic alternatives?

Chris Loughlin

Hi there, no, we provide no comment on this topic and today we would like to talk about our Q1 earnings and the future growth strategy.

If you could hear the audio, Chris was anxious and stuttering as he made the statement.   To me, this is as much of a confirmation as I need.   There are numerous reasons for TZOO to sell itself, namely that in 2013 tax rates go up significantly and 50+% founder has an incentive to cash out his 0 cost basis stake this year.   Also, the business makes sense as part of a larger company.   There is no real reason for it to be a standalone entity.   




So why is the stock back to 20 from 27?   They had a softish Q1 at 42 cents in EPS (only 2 people follow it, TZOO doesn't guide and they "missed" revs by a million) and a good Q2 at 45 cents in EPS.   They are runrating ~1.90 in EPS (I see small evidence of seasonality but they claim Q2 is softer than Q1).   On the Q2 call they announced they would hike marketing spend 3-4M a quarter (15-20 cent bottom line hit) to accelerate subscriber growth.   They will do this for 6 quarters and it will take 12-24 months to see the gains.   Immediately the stock was hit from 23 before bottoming at 19.5 yesterday.   I do not believe this 15-20 cent hit should be "expensed" in valuation models.   Worst case, a year goes by and they don't get a good return from the marketing spend and they dial it back to Q2 2012 levels.   Poof, you have 45 cents in EPS again.   Plus, they have been growing top line at 5% or so even before this new marketing spend.   Obviously the "street" doesn't like the fact that 2013 EPS will now be down from 2012 EPS and have rendered this company dead for at least a year.   I think they will use this new marketing spend as an excuse when they announce a transaction in the fall claiming that it makes more sense to be private/consolidated with a larger company while they go through this transitional period.   


Bottom line, there is $2.50 in net cash, 25% EBIT margins, business been around for almost 15 years, its trading at a 10% FCF yield net of cash.   Note, the founder has only sold stock at 59 or higher so that gives you some indication of what he thinks its worth.  Also, they bought back 500,000 shares at $30 in q3 2011.   They haven't bought back any since.

The business doesn't have to be sold to make money on this idea.   If the new marketing spend works you could easily get to $2.50 in EPS in 2014 (modest growth off of the $1.90 runrate now) and since the company will indeed be growing and given the industry its in and margins can put 20x multiple on it + the cash and get 150% return.   


Sale or by mid 2013 we'll see growth off of the increased marketing spend.
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