This is the tale of two online travel companies – company A and company B.
Company A raked in $21.8 billion of gross travel bookings in 2009 and is by far the largest online travel company. It generated $3 billion in fees, or revenues, from those bookings. Those fees are expected to grow 17% in 2010, according to consensus. EBITDA is expected to reach nearly $950 million in 2010, up 12% YoY. Its market cap is $7 billion and the shares trade at an EV/EBITDA multiple of 6.7x. The company is levered at 1.1x debt to TTM EBITDA and pays a quarterly dividend of 7 cents a share, the only Internet company to do so. It also trades at a PE multiple of 14.7x 2010 EPS with a PEG of 1.1x and has a 10.5% free-cash-flow yield with FCF per share growing 16% in 2010.
Company B raked in $9.3 billion in gross travel bookings in 2009 and generated $2.3 billion in fees from those bookings. Its revenues are expected to grow 19% in 2010 and EBITDA expected to grow 25% to $730 million, so margins are expanding. It has a market cap of $10.7 billion and trades at an EV/EBITDA multiple of 14.5x. It is levered at 0.9x debt to TTM EBITDA. Company B also trades at a PE multiple of 21.2x 2010 EPS with a PEG of 1.0x and has a 5.4% free-cash-flow yield with FCF per share growing 18% in 2010.
Company A is Expedia (EXPE) and Company B is Priceline (PCLN). Priceline in my view is properly valued and has more room to run while Expedia is undervalued. Priceline has been taking share in the lucrative European hotels booking business. However, Expedia’s results over the past year has been good, beating consensus expectations in every quarter in the past year. Despite that, the shares have languished, dropping 25% since last October 2009, while Priceline’s shares have soared.
I have written about the disparity in the past, see previous write-up Flying High With Expedia. I am repeating the analysis here, which shows that if one were to value Expedia at Priceline’s EBITDA multiple, then Expedia’s shares would be worth $45 per share, 93% above the current share price. The 10.5% FCF yield is extremely attractive. Many Internet companies trade at less than half that yield, implying that EXPE shares should at least be worth 50% above the current share price.
This is clearly a situation that should not persist. Management should use its cash to buy back shares. In fact, I believe the model is underlevered at 1.0x EBITDA. The company should lever the balance sheet to about 2.5x EBITDA and use the cash to shrink the equity by approximately 15%. Other ideas for value creation include selling several online travel assets. It can also look at spinning off TripAdvisor into a separate publicly traded company.
So I am recommending that activist investors buy the shares and force management to enhance shareholder value by employing the suggestions above. The largest shareholder, John Malone, has to be displeased with the valuation. Or maybe it is time for private equity firms take another look at the sector.