HomeAway, Inc. (AWAY), is the #1 worldwide leader in online vacation rentals. In June, 2011, Francis Gaskins, editor of the IPODesk.com warned subscribers to stay away from AWAY, opining that the IPO price of $27.00 was too high, the company's organic internal growth rate of 30% was too low, and that a whopping 81% of the proceeds were actually bailing out insiders.
Notwithstanding Mr. Gaskins' well thought-out opinion, the stock popped nearly 40% on opening day when it rose to $37.80, and for the next few months it traded well above the IPO price before reaching a high of $45.00 and crashing to $20.00 in December, 2011. So, who was right, and who was wrong about the IPO is really a question of timing.
It's my view that the company has matured, it's growing nicely, and the economies of scale are becoming visible and impacting on earnings. I believe investors should take a look at AWAY, which closed at $23.23 on 1/25/2013.
Based in Austin,Texas, AWAY was an early entry into the fast-growing consumer market trend of vacationers going online to book vacation rentals from private owners of homes, condos and cabins. The company generates income from listings they sell to property owners on an annual subscription basis. The 5 Tier subscriptions are payable annually in advance to AWAY, and they range in cost from $349.00 to $999.00, depending upon the upgrades selected and number of sites the listing will appear on.
Once a subscription is paid, the subscriber can set up the listing site which includes photos, pricing, a calendar showing the availability of the property, and all the information needed for a vacationer to make a booking. It's a very attractive proposition for property owners (like myself) looking for extra income to cover property taxes and carrying costs of second homes.
Since the concept really works for all parties (property owners and vacationers alike), some 720,000 property owners in 168 countries have already subscribed to AWAY's program. As a customer myself, I'm delighted with the results.
The HomeAway portfolio includes the leading vacation rental websites HomeAway.com, VRBO.com and VacationRentals.com in the United States; HomeAway.co.uk and OwnersDirect.co.uk in the United Kingdom; HomeAway.de in Germany; Abritel.fr and Homelidays.com in France; HomeAway.es and Toprural.es in Spain; AlugueTemporada.com.br in Brazil; and HomeAway.com.au in Australia.
In addition, HomeAway operates BedandBreakfast.com, the most comprehensive global site for finding bed-and-breakfast properties, providing travelers with another source for unique lodging alternatives to chain hotels.
Building An Economic Moat - Eliminating Competition
As you may know, the renowned Warren Buffett coined the phrase Economic Moat. The term refers to the advantages a company has over its competitors. In the case of AWAY, it built the moat upon inception by acquiring 8 companies in the web-based vacation home rental market. In fact, the genesis of AWAY was a start-up by accretion. It eliminated the major competitors by buying them.
Since these early acquisitions, the company has made 10 additional acquisitions, with its most recent being Top Rural S.L Spain in April, 2012. Growth through accretion with the result of eliminating competition has been a dynamic way to go and, in my view, will translate to continued growth and profitability.
In addition, AWAY's customers are unlikely to jump ship and seek alternative methods of renting their properties because the AWAY system really works and its distribution system is global. Drawing from one's own experience is a great yardstick. As mentioned, I listed my second home property with the AWAY system and my home consistently runs around a 60% occupancy. There's no marginal efficiency for me to subscribe to another listing service.
Regarding the mini listing website that comes with the subscription, the template is simple to use. As a non-techie, I was able to set up my site listing, including photos etc., in an hour or so without aggravation and without asking my brilliant hi-tech minded son for advice.
Travelers get to enjoy residential properties (homes, apartments, lofts, cabins & condos) that offer a LOT more room to relax, and with added privacy, plus the cost is far less than traditional hotel accommodations. So, it's really a no brainer for folks seeking a different and memorable vacation experience. For example, my vacation home is around 1,600 square feet, and with two bedrooms, renters often share the cost with friends or family that come along. All of this for $150.00 per night!
Having experienced AWAY as a property owner, it was simple for AWAY to earn my business as a vacationer, and this point speaks of the brilliance of AWAY's business model. I've traveled the world a good part of my life and I simply no longer enjoy staying in crowded and expensive hotels. I enjoy cooking at home, I enjoy privacy, and saving money is also an objective. So, now when my wife and I travel, we book a private home or condo using AWAY. In the spring we're going to France and we booked a wonderful loft in Paris through AWAY, and the cost is less than one-half of a hotel.
A Logical & Simple Business Model to Understand
As a stock trader and a long term investor, it's refreshing to trade and invest in the shares of a company that I know a little something about from first hand experience. It's also a delight to really understand a company's business model and its pros and cons. Last, but not least, I like investing in a profitable company that has a SIMPLE business model. In our high tech world it's very easy to get caught in deep weeds and never really understand what the prospects of a company are.
Nothing is Better Than Residual Income
Throughout my private business career, I had the opportunity of investing in many different kinds of businesses. The biggest winners were always those that developed residual income. If you have to sell something new everyday to make money, you're faced with a lot of variables. But, if you can sell something today, get paid in advance and the customer buys it over and over again for the next 5 or 10 years, it's a great business.
And this is precisely what AWAY has been able to accomplish. Their renewal rates are around 76%. As their critical mass continues to grow, the profit margins should increase because the acquisition costs have already been paid for.
Here's some quick metrics for AWAY:
|Home Away, Inc. Significant Metrics|
|Closing Price 1/18/2013||$22.71|
|Total Revenue Q3 2012||$73.1 Million UP 19.6%|
|EBITDA Q3 2012||$24.2 Million UP 12%|
|TTM Free Cash Flow||$78.2 Million UP 25.1%|
|Last 12 Months EPS||$0.45|
|Previous 12 Months EPS||$0.37|
|Next Year Est. EPS||$0.83|
|Compiled by Craig Van Pelt|
Leverage From Increasing Scale Justifies Present PE
While AWAY'S present PE of 50.47 is high for the sector, it's my view that it's justified considering the operating leverage AWAY is garnering from growth. As mentioned above, their income is residual as exemplified by the 76% renewal rate of property advertisers. Clearly, as the customer base continues to grow organically, overhead expenses and cap-ex won't increase in the same proportion. As this process repeats itself Quarter after Quarter, the valuations will become compelling and it's PE ratio will quickly come in line with the sector. It may even command a premium over the sector PE because of its growth, economy of scale, residual income, and its global footprint.
For example, for the 9 months ending September 30, 2012 revenues increased 21.5% from the previous 9 months, but net income increased a whopping 61.8%.
The following CHARTS serve to further illustrate the AWAY growth and Leverage From Scale:
HomeAway Revenue Growth
HomeAway Adjusted EBITD
HomeAway Free Cash Flow
For all of the reasons stated above, I suggest that investors watch this stock. If it dips lower to its technical support level of around $20.00, I'll be a buyer. I'm comfortable with what the company has accomplished since going public. I understand it's business model and I've experienced it as a customer. Lastly, it meets the definition of Warren Buffett's "Economic Moat" which, theoretically, makes the company more valuable.