New Highs Again: This Travel Business Is Going Places

Every day after the market closes, I run my screen in order to find new trading opportunities for the next market open. Today I was pleasantly surprised to find a company I had not heard of before tick all the right boxes.

Lindblad Expeditions (LIND) is a cruising and travel service business aimed at the higher end of the travel market. It recently surged to a new yearly high on solid volume after an earnings release on the 2nd August.

Tapping Into The Experience Economy

Take a look at the Lindblad website and you will immediately see what this company is all about. Lindblad offer unique and wild experiences that “turn vacationers into active and engaged explorers.”

Whether it is cruising the Galapagos Islands, exploring wild Alaska or adventuring in Belize, Lindblad is a company that taps into the fast growing ‘experience economy’.The experience economy has been discussed in various publications from Harvard Business Review to The Guardian and beyond. You’ve no doubt heard of it too.

The basic premise is that as we become wealthier, we are spending less on material things and more on unique experiences. We like to do new things, create lasting memories, and of course, tell everyone about it afterwards (via social media).

However, just because Lindblad operates in this niche doesn’t necessarily make their stock a viable investment. Indeed, as a quantitative investor, I personally care more about the numbers behind the business than the narrative that accompanies them. The idea of the experience economy is enticing but it’s also important to consider the fundamentals of this stock and how that relates back to the share price.

A Look At The Fundamentals

When I run my screen looking for undervalued small caps, there are a number of things I like to look at. Each serves as a test, which must be passed before moving on to the next criteria.

1. Liquidity

Firstly, I like to look at share price, market cap and float. At $14 per share and $600 million respectively, the share price and market cap in LIND are still low enough to tempt momentum traders into pushing this stock higher. That’s important because I want there to be as many eyes on this thing as possible. That’s what is going to make it move.

Equally, the float of 25,231,204 shares is small enough so that if we did see a sustained push there is unlikely to be much resistance there. This is especially true since the stock also has a low short float currently standing around 2.52%.

There is also no chart resistance on all time frames for this stock to run into. In short, the liquidity and technical aspect of this stock is positive.2. Valuation

The next thing after liquidity is to look at some of the latest earnings reports and how they stack up to the current market cap.

The most striking observation is that we have strong numbers for both yearly revenue and EBITDA. This is in itself somewhat rare in the small cap space but not entirely unheard of. Nevertheless, it’s pleasant to find numbers like these:With these figures LIND trades at around 12 times latest EBITDA and 2 times yearly revenue. Remember, market cap is around $622m. Net income (4.21m) is on the low side but gross profit (136.05m) and earnings growth (216.13%) is supportive.

Of course, there are businesses in the small cap space with similar earnings ratios but not all of them come with a promising narrative and chart setup. Valuation is important but timing is also key.

3. Balance Sheet

As a rule, I don’t spend too much time looking into the balance sheet, as I find for short to medium term plays like this, much of it is already priced in. But, according to latest figures, LIND has a total cash balance of $114m, which means it is trading at just over 5 times cash.

That’s another tick for the bull side. However, this is balanced out by $190m in debt, $188m of which is long-term debt. Purchasing and leasing cruise ships is not cheap of course so some debt is to be expected.

Taking a closer look at assets and liabilities, you will find that LIND has around $460m in total assets and $341m in total liabilities for a total equity in the realm of $120m. Again, this means LIND is trading at around 5 times book value. These are all perfectly adequate numbers particularly in comparison to industry and universe peers.

4. Upside Potential

One could argue that a stock in a fast growing industry (for which the experience industry is one) could easily be priced between 15-20 times earnings or more. So to find a stock like Lindblad, priced roughly 12 times earnings and 5 times book, is potentially a good find. Of course, this should be balanced by the fact we are dealing with a relatively small company with a small market cap that is more at risk from a change in circumstance.

However, based on similar logic and taking into account optimistic commentary on earnings growth and revenue, we feel we can make the case for a new price target in advance of $17. Under a scenario of 17x current earnings, we get to a market cap of around $838 million ($49.3 x 17), which would put the share price around $18.80, a 34% premium to the current market price.

Alternatively, if we assume a 6% markup in earnings to $52.5 EBITDA, we get a market cap of $787.50m if calculated at 15 x earnings. That gives us a price target of $17.50.

Both options seem like conservative and reasonable markups to current pricing based on the latest economic factors staying relatively consistent. They also provide us with some margin of safety given the current price level at $14.

Risks

As with any small cap stock, there are plenty of risks to be aware of and this stock is no different.

Relatively low liquidity can work for you as well as against you, so a drying up of liquidity could create a volume gap and therefore a sharp test lower. Of course, the benefit of investing in a small cap is that your losses are limited only to the sum you put in.

For a company with over 500 employees to have a market cap of $600 million is quite good, and as we showed earlier, there are valuation reasons for owning this stock at this level. Therefore, most of the risk in this stock as we see it relates to strategic risk – in the sense that poor business decisions could cause the company to move in the wrong direction, which would have a negative impact on sales and revenue.

It should be noted, however, that recent business decisions have looked strong. In the most recent earning call, for example, it was noted that:

“We have already booked 99% of our anticipated ticket revenue in the current year with strong growth”.

The other risk therefore stems from geopolitical and weather events that could cause problems with popular expedition routes and lead to reduced sales. This risk is somewhat reduced by a good level of diversification in the types of cruises that Lindblad offers. More details can be found on the company website.

The other major risk can be attributed to macroeconomic events, which affect all businesses on some level.

Final Thoughts

Obviously, there are hundreds of reasons and factors that influence whether you invest or trade in a particular stock and we have only looked at a handful.

In general, I like to focus on what I can measure. As a quantitative investor, facts, numbers and historical analysis provide me with my reasons for getting into a stock. When these reasons are backed up by a healthy narrative, things are even better and there is usually grounds for a good investment.

My personal win rate may not exceed 50 to 60 percent using this approach but it is the profit you gain from your winners as opposed to the losses from your losers that ultimately matter and in that regard, this stock looks like a good opportunity.

We feel confident enough to enter a position in LIND knowing that nothing is guaranteed but that there are enough positives here to hopefully grab another winner.

Disclosure: I am/we are long LIND.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.