TravelZoo Earnings Preview: Third Quarter 2008

Travelzoo (TZOO: 27.04 -0.92%) is scheduled to report their fiscal third quarter 2008 results after the market closes on Monday, October 27. Based on our analysis, we at eChristianInvesting are expecting TZOO to report disappointing results that miss Wall Street’s consensus expectations.

Analyst Expectations

We are forecasting revenues of $21.6 million and EPS of ($.11). This would represent a 9% increase in revenues from last year’s $19.9 million in the same period. The current analyst consensus calls for revenues of $21.9 million and ($.09) EPS. The company has provided no guidance.

Travelzoo has managed to transform itself from a profitable, Wall Street darling to a money-losing business that shows little sign of improvement. The company’s decision to expand internationally has proved to be very costly. Last quarter, Travelzoo lost $2 million in Europe and over $3 million in Asia Pacific. These investments have produced relatively little in the way of revenues – only $90,000 in Asia Pacific – and are expected to continue producing losses for the next two to three years.

In addition, we also believe that Travelzoo is beginning to feel the effects of a weakening economic environment that is negatively impacting consumer purchases in areas like travel. While Travelzoo may not be as affected as other online travel companies (Priceline, Expedia and Orbitz), we believe that top-line growth could prove very challenging in the quarters ahead.

Share Performance

To date, Travelzoo’s shares are down 49%. The company has continued to under-perform the broader market indexes again this year after posting a 54% decline last year. To date, the Nasdaq has dropped 40% after a 10% gain in 2007.

Valuation

Shares are now trading at 26x consensus 2009 EPS estimates. This is above the relative valuations of their peer group. In addition, we believe that those estimates will be revised downward. Barring a breakthrough in the company’s international expansion efforts or a decision to abandon the international investments, we cannot recommend this stock.

Recommendation: Sell with a $5 price target.