Take Your Portfolio on a Trip with Priceline, Shun Orbitz

When it comes to booking online travel, Priceline.com (NASDAQ: PCLN) and Orbitz (NASDAQ: OWW) are among the biggest players. But with U.S. economic growth a mere 2.5% in the third quarter, are people cutting back or are they flocking to these sites to save money? And should you invest or avoid these two stocks?

Priceline will report its third quarter earnings after Monday's close and those results are expected to be explosive. Analysts forecast an 85% spike in revenue to $1.42 billion and an 82% EPS rise to $9.02. During its second quarter, 50% of its revenue came from outside the U.S. -- a 90% increase over 2010.

And Priceline must be doing something right because it is growing much faster than the industry. According to an April 2011 eMarketer forecast, online travel sales in the U.S. were expected to increase a relatively paltry 8.5% in 2011 to $107.4 billion -- increasing at a somewhat faster 11% rate in 2012.

I found it interesting that eMarketer expects online travel growth will be mainly due to rising airfares. Specifically, it expects a 5.9% rise in the average amount booked online from $1,145 in 2011 to $1,213 in 2012. Another source of growth is that 4.7% more people are expected to book travel online -- from 93.9 million in 2011 to 98.3 million in 2012.

And Priceline is holding on to its number two market rank as people look to cap how much they pay to travel. As of October 8, 2011, it remained the number two online travel agency -- with 10.11% of visits behind market leader Expedia (NASDAQ: EXPE) with 12.54% and ahead of Orbitz (7.54%), according to Experian Hitwise.

Meanwhile, Orbitz is is growing at half the industry rate. Its net income for the third quarter, reported November 3rd, fell 37% to $11.2 million but its EPS of 11 cents beat analyst estimated by six cents a share. And Orbitz's revenue was up 4% in the quarter to $202.9 million.

But Orbitz seems to be struggling with a range of strategic issues from costs that are too high to legal disputes with suppliers. For example, Orbitz incured $7.3 million in contract labor costs, its marketing expenses rose 8% to $61 million and most troubling -- its overhead costs increased 17% to $67.7 million.

And Orbitz has not been able to include as many travel options as competitors. For example, AMR Corp.(NYSE: AMR)'s American Airlines tried to keep its price display off of Orbitz but recently lost a court fight to do so.

So should you invest in Priceline and avoid Orbitz? Here's why you should consider it:

• Priceline: rapid growth, highly profitable; reasonably priced stock. Priceline's sales have increased 31.9% in the past 12 months to $3.65 billion while net income rose 7.8% to $720 million -- yielding an impressive 19.8% net profit margin. Its PEG of 1.18 (where a PEG of 1.0 is considered fairly priced) is reasonable on a P/E of 36.4 and expected earnings growth of 30.8% to $28.31 in 2012.
• Orbitz: slow growth, unprofitable; dirt cheap stock. Orbitz's sales have increased 2.6% in the past 12 months to $772 million while it lost $69 million. Its PEG of 0.09 is extremely cheap on a forward P/E of 24.8 and expected earnings growth of 288% to $0.12 in 2012.

Both Priceline and Orbitz are risky bets at this point -- but for different reasons. Priceline is poised to plunge unless it beats expectations and raises guidance. But based on its recent performance, there is a good chance it will do just that and its price will rise -- when it has beaten in recent quarters, its stock has risen nearly 10% in the aftermath.

Orbitz appears to be in a weak position strategically but it could be a tempting acquisition target for a larger competitor. If it survives through 2012 and actually achieves its earnings growth forecast, its stock would be screamingly cheap at this level. But given its most recent report -- it appears to be having significant management problems.

I would consider investing in Priceline and avoid Orbitz.