Gravy Train Coming for Orient-Express

Compared with this time last year, when travel was still being affected by the SARS epidemic and the war with Iraq, business is booming. However, shares of travel-related stocks have stumbled. In the last month, while the S&P 500 is up nearly 1%, the Dow Jones Lodging Index is down about 3%.

Perhaps this is because many of these stocks had such a big run-up leading to the summer months, so the expectations of better results were already factored into the shares. Indeed, the lodging index is up close to 10% year to date, still better than the flattish return on the market overall.

This does not explain, however, why shares of Orient-Express Hotels (OEH Quote) -- the owner and operator of ultra-high-end and unique hotel properties around the world -- have not only lagged the market in the past month, down slightly more than 3%, but have also underperformed year to date, falling 6%.

Orient-Express' underperformance comes even though the firm not only reported better-than-expected second-quarter results -- earnings of 38 cents, up nearly 23% from last year and a penny better than the consensus estimate -- but also sounded very bullish about upcoming third-quarter results.

Trading at a price-to-earnings ratio of just 15 times the consensus estimate of $1 per share for 2005 and an enterprise value to 2004 estimated EBITDA ratio of just 12, Orient-Express is one of the cheapest lodging stocks around. Indeed, comparable ratios for the other lodging sector stocks average over 20 P/E and 17 EV/EBITDA, respectively.

One problem could be Orient-Express' capitalization and ownership structure. The company's equity market value of just over $500 million means it's probably not the first place large-cap portfolio managers turn for exposure to the travel-related sector. Making matters worse -- from a liquidity standpoint -- is that Sea Containers(SCRA Quote), Orient-Express' former parent, still owns 14 million OEH shares, or 42% of the stock outstanding. It has been Sea Containers' intention all along to sell its remaining holdings.