Is it finally time to buy TripAdvisor?

TripAdvisor (Nasdaq: TRIP) recently reported quarterly earnings of US$0.38 per share on revenue of US$197.1 million, versus analysts' estimates of US$0.41 per share on US$203 million in revenue. The markets promptly punished the online travel company, spun off by Expedia (Nasdaq: EXPE) in December 2011, by sending its stock down 16.77% to US$36.18. Expedia and priceline.com (Nasdaq: PCLN) stock prices were down "in sympathy," 4.47% and 5.19%, respectively. TripAdvisor's revenue shortfall resulted from a change in how it measures pay-for-click traffic when its site visitors click on advertisements and then book travel on advertisers' sites. TripAdvisor offers reviews and flight searches, but redirects visitors to other sites for final booking.

TripAdvisor is rated in The Motley Fool Earnings Quality Score database as an "F" for earnings quality. The database ranks stocks "A" through "F" based on price, cash flow, revenue, and relative strength among other things. Stocks with poor earnings quality tend to underperform, so we look for trends that might predict future outcomes.

Source: S&P Capital IQ.

TripAdvisor's 99% gross margin results from no inventory and virtually no cost of goods sold. Revenue rose by 16.5%, but only half the prior year's rate of increase. Selling and administrative costs rose 13.5% during the year, from 37% to 42% of revenue, and the trend is up. Therefore, operating and profit margins continue to deteriorate.

The devil is in the details, and TripAdvisor's margin erosion is only half of the story. The cash management picture is so scary it's like being in a Final Destination movie. Accounts receivable stand at US$96.87 million and days sales outstanding are 45 days — OK, but not great. The company has US$28.41 million in payables, but days payable outstanding are at 886 days, up from 727 days year over year. For a company with quarterly operating cash flow of US$61.76 million, this is unacceptable.

Lastly, the company issued US$396 million in debt during the year, but paid Expedia US$405 million related to the spinoff.

TripAdvisor's price-to-sales ratio of 8.9 highlights the market's high expectations. Even with the recent price decline, the P/E still stands at 27.41, higher than revenue or earnings growth trends. Since trading began last year, the stock has advanced 31.8%. Revenue is expected to rise 21% to US$771.09 million. Based on declining economic conditions in Europe and continued weakness in the U.S., I would not be betting against the devil anytime soon.

Expedia
Last Thursday, Expedia reported better-than-expected earnings and revenue for its second quarter, assisted by higher hotel bookings. Its acquisition of Via Travel last March also helped its numbers. As a result, the stock rose nearly 20% to US$54.90 a share. The company reported revenue of US$1.04 billion and earnings per share of US$0.89 versus US$1.024 billion and US$1.00 per share earnings for the year-ago quarter. These numbers represent a modest 2% year-over-year revenue increase, and an 11% earnings decline.

In addition to slight revenue increases, Expedia's costs are also rising. The cost of goods sold, while only 22% of revenue, is up from 19% last year. Administrative costs are very high at 51% versus last year's 47%. Operating and net profit margins have fallen as a result to 15% and 10%, respectively. The company carries no inventory but receivables rose 9% year over year.

Like TripAdvisor, days payable outstanding are a whopping 506 days. Worse yet, payables equal US$1.275 billion, which is 123% of revenue. In addition, Expedia carries US$1.249 billion in long-term debt. There is no excuse for this cash-flow manipulation because Expedia has decent cash flow metrics.

Expedia carries US$1.815 billion in deferred revenue on its balance sheet. This unearned revenue is a good thing as long as the company continues to deliver: If any of this prematurely finds its way as revenue on the income statement, it's a bad thing as it would be an overstatement of revenue.

Expedia's shares have risen 85% since January, and its revenue and earnings growth rates don't justify this price appreciation — especially in a lukewarm economic environment. Use the recent price jump to take profit.

priceline.com
priceline.com will report quarterly numbers Aug. 7. I wrote about priceline.com in April and warned that its price would likely abate from its lofty US$745 at the time. The stock started 2012 at US$485.15, rising 30% to around US$630, until Friday, when the stock rose "in sympathy" with Expedia's earnings report to US$678, a 40% price increase. Analysts are expecting priceline.com to report US$7.26 earnings on US$1.35 billion in revenue, increases of 32.24% and 22.73%, respectively.  I still believe priceline.com is overpriced at this level and you should expect fairly large price swings going forward.