Expedia: Share Buyback Affirms Hidden Value

Expedia (EXPE) is the largest online travel content company, headquartered in Bellevue, WA. The Company through its portfolio of well-recognized brands like, Expedia.com, TripAdvisor.com, Hotwire.com, Hotels.com, Expedia Corporate Travel, Classic Vacations® and a range of other US-based and international businesses that provide travel products and services to leisure and corporate travelers.

The Company is the fourth largest travel company in the world and the third largest in the US. The Company’s brands operate international sites in the United Kingdom, Australia, Denmark, Sweden, Norway, the Netherlands, Spain, Italy, France, Germany, Canada, Japan and China.

Expedia Inc. and its brands had more than $17 billion in annual gross travel bookings in 2006. According to Nielsen/NetRatings, Expedia and Hotwire.com received 20.5 million unique U.S. visitors in March 2007 up 9.3 percent from previous year.

Microsoft founded Expedia in 1995 and the Expedia.com site was launched in 1996. In 1999, Microsoft took Expedia public. In 2002, Barry Diller, owner of USA Networks (currently InterActiveCorp / IAC) acquired a controlling stake in Expedia. In 2003 IAC purchased the remaining stake in Expedia. Expedia Inc. was spun off from IAC in 2005.

On June 18, 2007, the Company announced that it will buyback 42% or 116.7 million shares at $27.50 to $30 each for $3.5 billion. Expedia Inc. stock jumped 14.3% or $3.64 on June 18, 2007 on the news, the highest since it’s listing in 1999. Expedia spent $660 million buying back 30 million shares in January.

There have been rumors of Barry Diller taking the Company private and spinning off TripAdvisor into a public company.

Expedia trades at a significant discount to its peer Priceline (PCLN), which has appreciated 52% this year. At the close of market on Monday, June 18, 2007, Priceline was trading at $64.9, which is 47.2 times its trailing twelve months earning compared to 34 times earnings for Expedia. Expedia Inc. with its top brands and market leadership position is highly undervalued.

The Company generates significant amount of cash from its operations. Expedia generated $520 million in free cash flow in 1Q 2007 and had $637.7 million in cash on its balance sheet. Even after the run-up, the Expedia stock is at a discount to Priceline and has a very low price to cash flow and book value compared to its peers.

Online travel is a booming industry and the total online sales in 2006 were $78.8 billion. The industry is expected to continue to grow at a CAGR of 16.6% to $145.8 billion in 2010. In such a scenario the industry has been experiencing renewed interest from both VCs and PE firms.

In March 2007 Silver Lake and TPG acquired Sabre Holdings, owner of popular travel sites like Travelocity. The Blackstone Group (BX) along with its affiliates took over the Travelport business of Cendant Corporation for $4.3 billion in August 2006.

In 1Q 2007 Expedia Inc. reported 12% increase in revenues to $550.5 million over $493.9 million recorded in 1Q 2006. Strong advertising and hotel revenues drove the growth in revenues. Merchant hotel revenues grew by 17% in the first quarter. Gross margins of Expedia increased by a healthy 163 points.

The Company’s cost-cutting initiatives resulted in savings of almost $10 million during the quarter and the Company expects to achieve $50 million in saving by the 4Q 2007. The Company’s partner services group has been growing rapidly. Expedia.com has the highest click through rate of 4.9% for sponsored ads in the industry.

Driven by the success of TripAdvisor’s user generated content, the Company has been looking at expanding its media business. The Company has acquired a number of smaller players in this space, including SmarterTravel, TravelPod, Travel Library and Steve’s group. The Company is also looking at ways for monetizing the 90% plus of the 60 million unique monthly visitors who don’t do any transaction with Expedia or its brands by introducing display advertising.

Expedia Inc. experienced robust growth of 32% in the European market and gross bookings increased by 8% to $5 billion. The Company’s North America business has been experiencing stiff competition and this reflected in lower than expected growth of 1% in 1Q 2007. EPS for 1Q 2007 was 11 cents up from 6 cents in 1Q 2006. However, the Company has been experiencing strong demand from late March, which it expects to continue till the end of the summer season.

It makes sense for Expedia to buyback its shares when it is highly undervalued as the Company has strong cash flow. Neither Barry Diller nor Liberty Media (LINTA) are selling any shares as they are bullish on the long-term prospects of the Company.

The long term prospect of the company lies in building itself a juicy travel media business that generates high CPM display advertising revenues on the shoulder of TripAdvisor. I would not spin TripAdvisor out, but rather, integrate the 4 Cs.

EXPE 1-yr chart:

Comments

[jayesky]

Your logic is...well ridiculous. There are at least 50 new travel startups out there. Expedia is now in single digit growth. Why does it make sense to take the company from having close to 1 billion dollar positive cash flow per year to 2-3 billions of dollars in debt? (which will drop expedia's credit to nearly junk levels). Why not use the cash to solidify market dominance? for example to acquire assets from Travelocity? or Orbitz (IPO in the fall). or the 50+ other travel startups out there that have new and innovative UI.

it appears that the reason behind the buyback is to take the company private so that diller can get richer for himself. this does not appear to be in the best interest of the company. or the employees. or the shareholders.

explain yourself.