Description

It has been nearly 12 years since we last wrote up Travelzoo.  Lets start with acknowledging there is a Corona Virus in China. TZOO Asia includes Japan, Australia, China and other countries and is in aggregate just 6%  of total revenue. TZOO China members grew around +25% from Jan 2019- Oct 2019. Tzoo model is less impacted as an ad based model vs. take rate model. The average TZOO member stays 7 years and has 90% gross margins. TZOO does well in recessions (see below) 2001-02, and 2008-09. Travel suppliers are more prone to extreme discounting which resonates well with TZOO affluent member base. TZOO has what we believe is very wide reach with around 30 million members with some of the best travel demographics in the industry: 89% college educated, 44% earn over $100K a year, 69% over 45, 67% female, take an average of 3 trips per year, and 86% own a passport. Hotels love TZOO members: https://solutions.travelzoo.com/case-studies/

TZOO is acting like they are in great shape for 2020, and we think is at a rock bottom valuation is about 6x EV/EBIT from US/Europe for currently a 40% ROE business and w/ TZOO Asia at profitability +100% ROE. If TZOO hit its guidance TZOO will be around $1.75 a share in operating income on an $11 stock with better than 10% growth, 15% operating margins, and 100% ROE w/o debt. Loss-making peer Secret Escapes is at ~5x sales with approximately -30% worse EBIT margins than TZOO. Australian peer Luxury Escapes is valued at about 3x sales. TZOO the first mover 20 years ago which has a dominant advantage over competitors in the US is valued at 6x EV/EBIT from US/Europe and 1.1x sales. Our thesis is that TZOO not only dominates the US over Secret Escapes but has far higher profit margins and is an eventual buyout target, at what we think will be a significant premium. Secret Escapes is valued at around £510 million or more than 4x TZOO. So implied value of TZOO off Secret Escapes is $43 and off Luxury Escapes is $28, and using investment banker GCA report the implied value $23-29 vs. $11.20. Finally, in January 2020 TZOO acquired Jack’s Flight Club in the UK for $12 million in cash. Our guess is this signals management has a very high level of confidence that TZOO Asia will achieve guidance of profitability in 2020, which should lead to EBIT of around $19-20+ million on $125 million EV. Jack’s Flight Club consumed about 75% of TZOO 12/31/19 cash balance of $13 million and we think they generated $3 million in 4Q19.

Lets start by going back to recessions and SARS virus here are TZOO’s EBIT margins

2001 +21%

2002 +16%

2008 +17%

2009 +15%

Here are the catalysts and the story....October 2019 TZOO earnings call: 

·         “Looking forward, we expect the following: For Q4, we expect revenue growth to be higher than in previous quarters this year. We also expect operating profits and margins to increase versus the fourth quarter of 2018. As we extend our vacation product from Europe into other regions, we expect North America, and particularly the U.S., to benefit from the expanded offering. We expect revenue in Asia Pacific to increase, especially our revenue from China, where we will focus on. For next year, we see an overall higher growth rate in revenues than in 2019, which will allow us to further improve our operating margin closer to 15% and continue to grow EPS even though we plan to invest more in marketing and member growth.” October 2019 Earnings Call

·         TZOO January 15^th acquires 60% of: https://jacksflightclub.com/us-upgrade-january-sales-2020 (appears to be growing 50% with very serious margins)

·         TZOO China member growth  +26% YTD through October 2019 https://finance.yahoo.com/news/travelzoo-provides-project-asia-pacific-095900457.html

·         TZOO acquired top executive from Secret Escapes Asia in 4Q19 (Julian Rembrandt)

·         Guidance is for TZOO Asia to achieve profitability some way: restructure, growth, sell underperforming parts (founder temporarily moved to Hong Kong in 4Q19)

·         TZOO bought back ~5% of the company YTD 3Q’s 2019 at $15.00 a share 

 Travelzoo has has been a mystrey to many investors ...but Travelzoo simply drives extremely high margin incremental sales to high fixed costs travel suppliers (trains, cruises, planes, hotels). Travelzoo has 200+ producers globally that vet, test, verify, and negotiate the best possible deals negotiating with over 2,000 travel suppliers. These deals get published across 13 countries and 30 million members each week. Travelzoo negotiates perks like free valet, wine, discounts, to 4 and 5 star travel suppliers then in ad model advertises the deal. TZOO suppliers have told us it was possible they would spend all of their budget on TZOO. TZOO probably leaves too much meat on the bone as an affluent TZOO member only generates $4.25 in revenue per year to TZOO.  TZOO stimulates demand (wish list)  vs. searching for a destination (business). Groupon has a similar demand-generating travel offering but demographics are nowhere as affluent as TZOO's membership and Groupon Travel's revenue has been in freefall (down ~20% in latest quarter). Travel is a high passion, high spend and extremely profitable spend. This makes TZOO 30 million members globally far more valuable than the market appreciates. Take a close look at the case studies, 91% of the booking to the hotel had never visited before they saw the deal on Travelzoo. TZOO largely invented this category on the internet back in 1999.

Travel suppliers see great results (and have done so for 20 years): Why Hotels/Travel Providers LOVE TZOO: https://solutions.travelzoo.com/case-studies?fwp_solution=top-20

Members love the service as they don’t pay and stay an average of 7 years and produce around 90% gross margins. : https://solutions.travelzoo.com/

Today there are two scale pure play models Travelzoo and Secret Escapes.

·         Secret Escapes latest numbers from the Octopus Fund £510 million or about ~5x sales (1,000 employees) with negative low-teens margins

·         Travelzoo is valued at about $125 million or about 1.1x sales 94% of TZOO revenue has +18% TTM EBIT margins on core.

·         We believe TZOO would easily sell in the $250-400 million range!

·         Secret Escapes is having a very hard time moving into Travelzoo US market: https://trends.google.com/trends/explore?geo=US&q=%2Fm%2F013f34fr,travelzoo

·         Secret Escapes is doing better than TZOO internationally: https://trends.google.com/trends/explore?q=%2Fm%2F013f34fr,travelzoo

·         TZOO has traded at an average of 4.9x sales over 18 years as a public company vs 1.1x sales as of today. TZOO is poised to hit record ROE in 2020 if Asia is profitable. 

·         The company has had a number of twists and turns: hotel booking platform (a few years back), Fly.com (not a good idea - sold in 2017)

·         TZOO is back to basics approach over the last few years…appear to be paying off. If TZOO hits 2020 guidance ROE will be approximately 100%, w/o debt 15% operating margins and probably 12%+ growth.

·         If this trajectory hits, we expect TZOO could be revalued in the 13-20x multiple of EBIT TZOO could be worth $22-32 in 2020

·         These twist and turns has led to next-to-no analyst coverage and very light following on Wall Street (no road shows, no price targets, no investor day, but conference calls & mgt is reachable) 

·         Bird in hand value/Safety Net: TZOO is generating out of US/Europe about $18 million in EBIT a year (17% operating margin near record high) or $1.50 per share!

·         TZOO Asia is losing about $6-7 million per year, TZOO is strongly guiding to profitability in Asia this year (hired consultants, hired top executive from competitor, show 27% member growth, founder moved there for 2 months)

·         Founder takes zero comp and owns 50% of company

·         TZOO is aggressively buying back stockl, spending about $15million in little over a year (2^nd most aggressive repurchase since coming public) - shares outstanding are down 20% over the last few years.

·         Members are about 30 million globally

·         TZOO is positioned to grow 10% top line+ in 2020

·         SecretEscapes a UK-based TZOO clone is valued at 4.5x sales about the same size as TZOO with operating margins about -20% worse than TZOO. It is planning to IPO late 2020 or early 2021. Implies $43 per share for TZOO! 

·         Another clone in Australia, LuxuryEscapes is in the process of being sold at reportedly ~3x revenue... Implies TZOO is worth $28 per share

·         Barriers to entry are high in the US…TZOO has great installed base/brand after 20+ years.

·         Net Net: TZOO should trade at meaningfully higher than 6x operating income….later in 2020 IF they hit $1.70 possibly $2.00 in operating income, 10% (possibly better with Jack’sFlightClub)  top line growth, 15% EBIT margins….

·         Hotels would love to spend a lot more on TZOO advertising only if they could: The industry is largely driven by a take rate model while TZOO is a ad based high conversion great demographic source or traffic for hotels

Investment Bank GCA Savvian suggests TZOO should be valued at 2.4x sales and 17x EBITDA. Implied value for TZOO $23-28 per share. https://gcaglobal.com/market-insights/sector-report-internet-digital-media-q4-2019/ page 12. 

Risks:

Global spread of Corona Virus

fail to restructure TZOO Asia  to achieve TZOO Asia profitability (this seems unlikely now that they spent given their current cash balance and management owns 50% of the equity)

Nobody likes that CEO/Founder have sold some stock back to the company in the buy back. The flip side is they have kept there company ownership at 50% for years and the Chairman and Chief Talent officer does not take any compensation from the company. 

Disclosure: This does not constitute a recommendation to buy or sell shares of TZOO. We own shares in TZOO and we may buy or sell shares without updating this board. 

Catalyst

Catalysts:

Mosaic of Comps: Secret Escapes implies $43 a share, Luxury escapes implies $28 a share, GCA comps suggest $23-29 a share.

ROE goes from 40% to 100% with TZOO Asia b/e 

Secret Escapes buys TZOO as they want to go public

$1.80 in EBIT in 2020

TZOO Asia profitability (includes Australia, China, Japan etc) and is 6% of revenue (company has gone all in on getting this to profitabilty in 2020)

Jack's Flight club is a high growth high margin new business that has a $48 per year subscription and will likely expand to US and Asia from UK now. 

TZOO is a problem for Secret Escapes with a $500 million valuation as TZOO operates at far higher margins, dominates US, and looks to be setting up to battle back in Asia, yet trades at 25% of the valuation.