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Wotif this were a great company?

Sometimes the investment pickings are slim. Just now, with many shares spanning a range of ‘sort of expensive’ to ‘vastly overpriced’ to ‘you’re kidding’, exciting opportunities are few and far between. But they do exist, and one of them surely is online travel business Wotif.com (ASX: WTF).

You probably associate Wotif with cheap or last-minute hotel bookings – reflecting the company’s beginnings as a purveyor of, essentially, distressed hotel inventory. But the better way to think of this company now is as a fat and lovely cash cow. Not only does the company have $150 million in net cash, the margins in its core business are incredible: 100% at the gross level and over 40% at the net level.

The picture should get better, too, over time. Because, generally speaking, Wotif doesn’t have to spend much to grow its business, much of every incremental dollar earned will flow to the bottom line in a handy bit of economics known as operating leverage.

A closer look at the business

Wotif.com is Australia’s most visited online travel agency, according to Hitwise. Overall, the company sells one in 10 accommodation nights in Australia. Wotif also owns and operates lastminute.com.au and Asia Web Direct, among other sites.

The company’s growth over the last decade has been enviable. Revenues have ballooned from $12.6 million in 2003 to nearly $140 million in the last 12 months. Net profits expanded from $5 million to nearly $57 million over this same period.

However, this growth looks to have slowed more recently, with a flattening topline and slightly declining profits. Some investors might take a look at the numbers and believe the company’s best days are behind and not ahead, especially considering a competitive environment that includes strong players from Flight Centre (ASX: FLT) to Webjet (ASX: WEB).

A few hurdles to clear

To find Wotif exciting as an investment idea now, as I do, you have to clear a few hurdles. First, you have to assume that Wotif can grow its business, rather than have flat sales indefinitely, while maintaining and growing margins. This looks to be a likely proposition for a number of reasons.

With an increasing number of hotel properties represented, strong brand awareness, and ample funds available to spend if needed on additional marketing efforts and perhaps the odd acquisition, Wotif should be able to capture further market share in its core ANZ market, both in the hotel and airfare spaces. Further, with new CEO Scott Blume having deep experience in the travel business in Asia, Wotif should be able to increase its Asian business over time as well, and at a relatively low cost.

Even assuming that growth, though, the shares don’t look to be dirt cheap, trading at six times sales, 18 times earnings and on an enterprise value to operating profit basis of just under 12.

Still, in my view, it would be naïve to expect such a high-quality business to trade for an excessively cheap price, and thus the price Mr. Market is offering today appears to fall in the ‘GARP’ category — that is, growth at a reasonable price. It should also be noted, against the current price and future prospects, that the shares also pay a fully franked dividend in the 5% range.

(Finally, you have to assume management knew what it was doing when it picked its ASX code!)

Foolish takeaway

Between the likelihood of future growth, the relatively reasonable share price and the fully franked dividend, I would expect Wotif shares to outperform the overall market over the long term. Patient, Foolish investors seeking an alternative to overpriced blue chips might well want to consider adding the shares to a diversified portfolio.

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Motley Fool writer/analyst Catherine Baab-Muguira doesn’t own shares in any companies mentioned.

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