Travelzoo’s Pristine Balance Sheet Creates a Safe Buying Opportunity

Travelzoo (NASDAQ:TZOO) is an internet company that posts deals from businesses in the travel, entertainment and restaurant industries. It differs from other travel sites by exclusively covering deals and specials instead of direct reservations. With the company’s strong financials and many people resuming travel, TZOO stock is a worthwhile buy at its current price near $14.

The company operates in three segments:

• Travelzoo North America, which consists of operations in Canada and the U.S.
• Travelzoo Europe, which includes operations in France, Germany, Spain and the U.K.
• Jack’s Flight Club, a subscription service for premium members to access and receive flight deals.

Travelzoo derives its revenue from advertising fees, including listing fees paid by travel, entertainment and local businesses. Most of the company’s revenue comes from from North America.

Thousands of companies use Travelzoo to promote their deals. These include travel luminaries such as Hilton Worldwide’s (NYSE:HLT) Hilton Hotels, Carnival’s (NYSE:CCL) Princess Cruises and United Airlines (NASDAQ:UAL).

TravelZoo is an ancient public company by today’s standards. They entered the market in an initial public offering (IPO) in December 2003. Since then, TZOO stock has been through boom-and-bust stock cycles where its price exceeded $90 only to come crashing down to reality. Over the last five years, the stock has traded between $3 and $20 — although that low price was largely driven by the Covid-19 pandemic.

TZOO Stock’s Financials Are Impressive

Travelzoo operates an asset-light business model. It has very few capital expenditure needs and hard assets on the balance sheet. Profitability is relatively easy for the company as long as the economy stays strong and people continue to travel (and search for bargains.)

As a travel-related company, Travelzoo had a tough 2020. Revenue declined 49% when global travel grinded to a halt for many months. The company reported a rare operating loss of more than $11 million last year.

Travelzoo revenue should rebound this year. However, a slower global travel recovery — particularly in Europe — will prevent the company from returning to 2019 levels in 2021. Full recovery may occur next year, but it’s unlikely travel behaviors will return to normal prior to 2023. Many people around the world are still feeling the effects of the Covid-19 pandemic and new variants of the virus.

Unlike American Airlines (NASDAQ:AAL), which has a highly levered balance sheet, Travelzoo has a pristine balance sheet. Cash on hand as of June 30 was $82.1 million. The company is expected to be profitable in 2021 and generate free cash flow as well.

Travelzoo’s Second Quarter Shows Road to Recovery

Revenue nearly tripled year-over-year from $7 million in the second quarter of 2020 to $19.1 million in Q2 2021. The increase was primarily driven by revenue from North America and strong voucher sales. EBITDA improved to $4 million and diluted earnings per share (EPS) was also positive at 22 cents.

A full recovery in revenue may take time; U.S results were still about 20% below Q2 2019 levels. Its recovery potential also may be negatively influenced by a slower return to normal conditions in Europe.

On the positive side, Travelzoo enacted many cost-containment measures which are driving a faster return to normalized margins.

TravelZoo trades at a high price-to-earnings (P/E) ratio because they may only earn an EPS of 15 to 20 cents this year. However, full recovery margins and cost-saving measures will produce EPS well above $1 per share at some point. From that perspective, TZOO stock is a bargain at today’s price.

Based on continuing EBITDA growth in the double-digit range for the next five years, my Discounted Cash Flow model produces values above $30 for Travelzoo shares. TZOO stock may pull back in an overall market retreat, but there is some support; the company will likely buy back its own stock if it gets too cheap.

On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other finance-related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University.