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Points International shares soar amid frequent-flier tailwind

About two-thirds of Points International’s revenues are from airline partners such as Southwest Airlines.

Boeing Graphics/Ed Turner

Points International Inc., the software company that helps consumers collect and manage frequent-flier miles, is also racking up huge rewards for its investors.

Shares in the Toronto-based company hit record highs this week and have soared more than 140 per cent over the past year as it boosts revenues from partnerships with some big-name loyalty programs.

Analysts believe the shares will keep climbing as Points forecasts record fourth-quarter revenues and continues to bring in new contracts as part of a steadily recovering travel market. "People are starting to recognize a loyalty economy as being a much larger economy than realized," Points chief executive Rob MacLean said in an interview. "We find ourselves sitting at the nexus of that industry between consumers, merchants and loyalty programs and that's a big part of what's driving our growth."

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The company is projecting revenue to range between $195-million (U.S.) to $205-million in 2013, an increase of more than 40 per cent compared with a year earlier. Mr. MacLean said about 60 per cent of the company's revenue is derived from the United States, 30 per cent from Europe and the rest spread out between Canada, the Middle East and Asia.

Analysts believe the company is on the cusp of greater international growth, particularly in China where loyalty programs are becoming more popular, but also where few companies are monetizing them.

"We expect China to offer [Points] a massive growth opportunity in the coming years, which we believe is not included in the company's share price," said Ascendiant Capital Markets LLC analyst Edward Woo in a recent note, where he raised his price target to $32 (U.S.) from $29, based on its Nasdaq listing.

Mr. Woo is one of six analysts with a "buy" recommendation on the stock, while just one says "hold," according to S&P Capital IQ.

"We believe Points in the best stock in our coverage universe for share price gains," said Mr. Woo, citing a combination of strong growth, a healthy travel industry and untapped markets.

The company was started during the dot-com boom at the turn of the century and makes money managing the loyalty rewards transactions from airlines, hotel and other consumer product companies. Its revenues comes from transaction fees, as well as the sale of points, which it buys in bulk from companies and then resells to consumers looking to top up their points for a fee. Another small but growing portion of its revenues come from its website, where consumers can track, trade and redeem their points.

About two-thirds of Points's revenues are from airlines partners, while the rest come from hotels and restaurants. Partners include Southwest Airlines and American Airlines, Fairmont Hotels & Resorts and American Express. Mr. MacLean said he expects more growth to come in the retail and financial services sectors in the near future. "This is a company that's just starting to come into its own," said PI Financial Corp. analyst Pardeep Sangha, who has a "buy" on the stock and a $33 price target.

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Points' stock hit a record $27.25 on the Nasdaq on Monday and closed slightly lower on Tuesday at $26.82, up from a 52-week low around $11 a year ago. The company started trading on the Nasdaq in 2011. It has been listed on the Toronto Stock Exchange since 2004, after graduating from the TSX Venture Exchange.

The company's shares have risen steadily since the global economic downturn grounded travellers and curbed consumer spending. On Tuesday on the TSX, the stock hit $29.40 (Canadian), a six-year high when accounting for a one-for-10 reverse stock split in early 2011.

Mr. Sangha says more companies are also turning to Points to manage their rewards programs, instead of doing it themselves.

Points is more expensive when compared with other online travel sites on the basis of its enterprise value – the market value of all its shares plus net debt – in comparison to its earnings before interest, taxes, depreciation and amortization. Points has an EV/EBITDA ratio of about 20, which compares with around 16 for Inc., 10 for Aimia Inc., nine for Expedia Inc. and eight for TravelZoo Inc.

Still, analysts say there are few companies like Points, which gives it an edge. "Nobody else has partnerships like they do and I don't believe that is something that can be easily replicated anymore," said Merriman Capital analyst Andrew D'Silva, who has a "buy" rating and $37.35 target (U.S.).

RBC Dominion Securities analyst Drew McReynolds is more cautious, believing the anticipated revenue growth this year is factored into the stock. Risks include the loss of key partners and decisions by the companies to handle their own loyalty programs.

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