Expedia: Travel Far With This Spin-off

Includes: CSD, EXPE
by: Andrew Corn

Founded in 1995, online travel leader Expedia Inc. (NASDAQ:EXPE) is a provider of travel services to customers all over the world. Spun off from IAC/InterActiveCorp (IACI) on August 9, 2005, the firm is traveling with the right crowd as a constituent in the Clear Spin-Off Index, which is now invest-able through the Claymore Clear Spin-Off ETF (NYSEARCA:CSD).

Expedia offers travel services online through a number of U.S., European, and Asian websites, as well as through offline retail travel agents. EXPE has set a goal of becoming the largest and most profitable travel seller in the world. It plans to accomplish this via a roll-up, with a portfolio of large travel companies from around the world.

On target with its mission, EXPE is already the largest internet travel agency in the world, third largest travel company in the U.S., and fourth largest in the world. Besides its signature Expedia.com, the firm has amassed these titles through a portfolio of companies including the luxury classicvacations.com, another group of businesses with the hotels.com brand, hotwire.com, tripadvisor.com, a corporate travel website, and a number of European and Asian travel companies. Headquartered in Bellevue, Washington, EXPE has been developing each of these websites to be a leading brand catering to a specific demographic of travelers.

Its success in the travel industry has produced solid fundamental data. EXPE has revenues of $2.20 billion which grew over the year by 6.66%. Looking at profitability, on a trailing 12 month basis, its operating margins are 17.47% compared to its peer group average of 5.59%, and its trailing 12 month gross margin is 77.99% compared to the industry average of 62.63%, demonstrating that its modest growth is quite profitable.

Recently, the company has been signaling that it is confident in its growth and profitability by initiating a buyback of its shares in a tender offer at a price between $18.50 and $22.00, with the current stock trading at around $20. The plan for them is to buy up to $30 million in stock or up to 9.8% of outstanding shares and 9.1% of outstanding Class B common stock. The buyback became effective at the beginning of this week and will expire on January 10, 2007. The stock, when tracked from its opening is down, but performing better than its old parent.

As far as valuation, the company itself views the stock as undervalued, as evidenced by the stock repurchase. This can be understood by comparing its trailing 12 month price to earnings [P/E] ratio of 36.12 to an industry average of 37.01, and its price to earnings to growth [PEG] ratio that is in sequence with the industry average at 1.56. For now traders are penalizing EXPE for its slower top line growth. We calculate that its profitability is providing strong returns for shareholders making this spin-off a strong member of our index and CSD.

EXPE 1-yr chart