Expedia: An Opportunity in Travel

Last week I traveled to Baltimore for the monthly editorial meeting for Taipan Publishing Group. Shortly before leaving my home office in Atlanta, I booked a hotel using Expedia Inc. (EXPE). Similar to previous trips, I was pleased with the choices available both from a price standpoint as well as the number of available choices. After a few short clicks I was on my way.

The past year has not been kind to companies operating in the travel industry. First high oil prices caused fares to quickly rise - dampening demand for transportation. Then, as if one crisis wasn’t enough, a global slowdown and lack of consumer credit hit travel demand from the other side. The result has been a sharp decline in the share price and extreme pessimism around the industry.

To illustrate the uncertainty surrounding the travel business, consider this quote from Barry Diller, Chairman of Expedia. Mr. Diller states that it is a “difficult environment… any predictions about its depth or duration would be foolish.” However, despite the difficulties, Diller states that the company is well capitalized, extremely focused on the travel business with no distractions, and he is convinced that it will emerge a stronger competitor.

Interestingly, despite the dour environment, the company still managed to grow revenue (if only by 10%). While trends in October may cause the fourth quarter revenue to be below last year, the situation is not so dour as to cancel out positive earnings. And a stock price in the mid 7 dollar range seems to more than adequately discount the challenges and uncertainty.

Expedia is not sitting idly by and hoping this storm will blow over. Instead, management is active in paring back any unnecessary expenses. Since sales and marketing were at levels that equal 35.6% of the revenue for the quarter, this is likely an area that will be trimmed. However, management is cognizant that investments must still be made in order to maintain market share and emerge as a strong player. Encouraging data points include new signed agreements with major hotel chains (including Marriott International (MAR)) and a completed acquisition of Venere SpA. This acquisition will expand the company’s footprint in Europe, the Middle East and Africa. Since most sales growth is coming from International markets, this move appears to be worthwhile.

Management appears to have a very strong commitment to protect the capital base of the company. This is especially important during a period where access to funding is very tight. This limited credit will likely cause a few competitors to go out of business, making for a better playing field for the company when better days arrive.

One final headwind noted by the company appears to be reversing. Previously, a strong US Dollar has caused international travel to become more expensive. However, it now appears that the Dollar is backing off its highs, which could reverse the trend and cause it to become less expensive to visit foreign destinations. Time will tell if this new trend will follow through, but with the amount of cash flooding the US economy, it wouldn’t surprise me to see the Dollar drop in relation to a basket of other currencies.

So in summary, despite a challenging environment, it appears that EXPE offers investors an interesting value. There will certainly be plenty of volatility in this name and a turnaround won’t happen overnight. But I do expect that in six to twelve months, we will see better prices as fear becomes less of an issue.

EXPE Notes

Disclosure: Author does not have a position in EXPE.

Comments

[Robert Nabloid:]

Good article. I like Expedia, I'm also a customer. I think it may have a bright future, eventually. I haven't looked at the balance sheet so I don't know how much debt they are burdened with - hopefully not much as there are some turbulent times ahead!

I see promise in the travel industry after the economy begins to come back. The problem is, I think things are going to get much worse, especially for companies that rely on discretionary/leisure spending. I think we'll have plenty of opportunity to buy travel companies for cheaper than they currently are. I personally would not pull the trigger yet. To each his own. There are still plenty of downside risks in the economy. I do agree with you, Expedia is well positioned to gain market share so long as it isn't overly burdened with debt and can trim back and weather the storm.

2008 Dec 16 03:42 AM

[Bill Fogarty:]

Good for Mr. Diller? What me worry? They guy is rich enough to weather any personal and most company financial storms. Mr. Diller if you want to buy a network have a look at activelifestyle.com. This is a travel network with 170 targeted sites. Oh yes. I own it.

2008 Dec 22 09:53 AM

[Zachary Sch...:]

Robert, there is always a chance we will see lower prices from this point, but I think we have gotten to a low enough spot to where the potential reward is much more significant than the risk. Debt is relatively low, but we have seen that even a small amount of leverage can kill in this market so I respect your caution.

Bill - best of luck with your network - and kudos for getting in a nice plug ;-) Maybe you would like to buy some advertising on my site zachstocks.com

There's my plug - happy holidays to all!
Zach
zachstocks.com

2008 Dec 23 11:11 AM

[elliot:]

Orbitz/Expedia/Travelo... = Ford/GM/Chrysler

They have been around since the beginning of time and are steadily losing market share to companies that offer better value (suppliers and meta-search).

The three of them are selling basically identical products, the same hotels rooms from the same database at the same price.

And they have massive advertising expense and an employee count orders of magnitude larger than other successful internet companies (Kayak has under 100).

Does all that sound like Ford/GM/Chrysler??

The fact that they have little value to the consumer (or the suppliers) is more worrisome to me then travel industry fluctuations.

I think their hope is not in the Expedia brand, but rather in some of their acquisitions - from TripAdvisor in 2004 to SeatGuru and others. If you feel that the Expedia corporate culture can nurture and grow their acquisitions and identify and acquire innovative travel companies - their stock will outperform the travel industry.

I am biased. My internet start-up, TripCart.com, aims to provide what the big guys don't. Planning the trip from a where to go, what to do perspective -
www.tripcart.com/usa-r...

Jan 18 09:40 AM

[frequent fl...:]

What about the tax ruling against them? I would guess that applies to all the OTA's.

Jun 11 05:22 AM

[Zachary Sch...:]

At this point Expedia is appealing the ruling. I'm actually a bit surprised that the stock hasn't reacted more to this news.

For whatever its worth, the ZachStocks Growth Model (zachstocks.com/zachsto.../) had a significant position in Expedia since January, but we have recently reduced the position to a small number of shares as the price now appears much more in line with the fundamental value.

Thanks for the question - will be interesting to see how this one shakes out.

Zach
zachstocks.com

Jun 11 02:55 PM