Expedia (NASDAQ:EXPE) is the world's leader in Internet based travel sales servicing audiences from casual to corporate including airline, hotel, car rental, and cruise bookings. Based in Bellevue, Washington, Expedia was divested from the Microsoft (NASDAQ:MSFT) family. Expedia currently markets it services to 20 countries worldwide.
Moody's currently has this issue rated at BA1 while S&P has it listed at a BBB-.
At Durig Capital, we have developed a process for our clients to review, select, purchase and monitor corporate bonds. Enclosed is our review along with supporting documents showing why we believe it makes sense with our corporate bond clients' portfolios. We reviewed 10,000 separate corporate bond listings to find what, we believe, is currently the best corporate bond for investors. The following includes our selection criteria.
Step 1 - Yield curve at 4-8 years out.
In our current interest rate environment, we like the 4 to 8 year range because we see long term inflation as a real risk. With that being said, short term savings and CD rates are almost non existent. Federal Reserve Chairman Ben Bernanke has made public the Fed’s pledge to keep interest rates at historic lows for the foreseeable future. Understanding, the undesirable nature of the two ends of the interest rate term structure, Durig Capital is recommending clients hold fixed income that matures in the handle portion of the barbell structure. If inflation expectations are realized sooner than expected, principal loses may occur.
Step 2 - We like companies that are profitable.
For the last quarter, Expedia’s net income was $114.26 million, or $.40 a share, compared with a net income of $40.9 million, or $.14 a share that was earned in 2nd quarter 2009. Expedia’s net income as a run rate (last quarter's net income times four) is $ 456 million a year, or about half their total debt, meaning with only their net income, they could repay 100% of the debt in just two years.
Expedia Inc has instituted a $.07 quarterly dividend as of March 2010 signaling financial strength from management.
Step 3 - We like companies with debt to cash ratios under one.
Expedia’s existing long term debt is $895.37 million, and their cash was $1.13 billion last quarter ended June 2010. This means that if Expedia wanted or needed to it could settle all of its debt with cash and still have over $230 million extra to boot. Their current balance sheet can be viewed here. For a company approaching $833 million in total revenues for the quarter, it's hard for to understand why their debt has such low ratings.
Step 4 - We like companies that are flexible with there capital structure.
Currently Expedia has a capital structure that is made up of $6.78 billion of equity and $895.37 million of debt which presents a debt to equity ratio of .132. This is a low number, all things considered. If Expedia were in a situation where it needed to raise cash and/or pay off debt, they are in a great position to do so by issuing equity via a secondary offering while not diluting existing shareholders a lot. They would only have to issue an additional 13% of the existing float in order to cover their debt obligations.
Step 5- We like higher yields.
Expedia bonds currently have a 5.494% yield. With the corresponding Treasury yielding 2.00%, this gives Expedia an attractive 3.49 % spread over Treasuries.
Step 5 - We currently like shorter maturities.
This Expedia issue mature in 08/15/2018, which is at the outer end of our time horizon. While a change in the yield curve could affect the principal, we would plan on holding this issue until maturity.
This is a good yielding bond for 8 years. These bonds should act similar to other bonds like Interpublic, Unitrin and Fidelity National Financial that have high yields and great balance sheets that we provided updated reports on. It is my belief that with the low levels of debt, good profitability, and a flexible balance sheet, they are well situated for an upgraded bond rating. You can find other corporate bonds listed on our web site here.
- Coupon: 7.456%
- Ratings: Ba1/BBB-
- Maturity: 08/15/2018
- Price: 112.542
- Yield to Maturity: 5.494
- Yield to Call: No Call
|Day Count Basis||30/360|
|Payment Delay||0 DAY DELAY|
|First Coupon Date||08/15/2007|
|Last Coupon Date||02/15/2018|
|First Settlement Date||03/15/2007|
|Bonds In Default||NO|
Expedia Inc investor information page is here.
Disclosure: The authors of this article have no ownership position in Expedia Inc