Soros's Travel Picks: 1 To Buy, 1 To Hold, 1 To Sell

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 |  Includes: CTRP, EXPE, TRIP
by: The Ethical Investor

In this installment of fund analysis, I will examine three major travel service holdings, namely Expedia (NASDAQ:EXPE), Ctrip.com (NASDAQ:CTRP) and Tripadvisor (NASDAQ:TRIP) from' Soros Fund Management.

George Soros initiated a new position in CTRP by purchasing 249,260 shares during the last quarter. He also owned 366,510 shares of TRIP and 320,210 of EXPE at the end of Q4 2011. In the article, I will evaluate the fundamentals of these companies and perform relative valuation to determine the attractiveness of the companies at current levels.

Some basic information about the companies is presented in the table that follows:

Company Basics

(EXPE)

(CTRP

(TRIP)

Market Cap (Billion)

4.5

3.98

4.33

Stock Performance 5 Yr

-18%

92%

0%

Stock Performance 1 Yr

-16%

-30%

32%*

Dividend Yield

1.1%

0.0%

0.0%

Debt to Equity

60%

0%

150%

Click to enlarge

TRIP was a part of EXPE until late last year. It was spun-off on December 20, 2011 and is up 32% since then. The three companies have a very similar market capitalization, however, CTRP has thoroughly outperformed EXPE in terms of stock performance over the last 5 years. During the last year, EXPE and CTRP have both lagged the broader markets. Coming to the balance sheet, CTRP does not carry any debt, while TRIP's debt to equity ratio is high, in my opinion.

Next, I observed the historical growth rates of revenue, income and book value, and the projected long-term earnings growth rates. These are summarized in the table shown below:

Growth Rates

(EXPE)

(CTRP)

(TRIP)

Revenue

Trailing Twelve Months

3%

21%

-

5 Years

9%

22%

-

EPS

Trailing Twelve Months

-20%

2%

-

5 Years

11%

19%

-

Book Value

5 Years

-14%

33%

-

Growth Projections

Next Year

15%

26%

21%

Next 5 Years

10%

16%

14%

Click to enlarge

EXPE's earnings from last year included Tripadvisor as discontinued operations. Going forward, Expedia is expected to grow its earnings at a faster pace than the spin-off unit. CTRP is projected to grow fastest among the 3 firms, modestly beating the 14% growth rate of TRIP. CTRP has also been consistent with its revenue growth rate over the last 5 years.

The next step in the fundamental analysis was the evaluation of margins and operational effectiveness of the 3 companies. The table that follows presents the evaluation results.

Margins and Operational Effectiveness

(EXPE)

(CTRP)

(TRIP)

Gross Margin (NYSE:TTM)

82%

77%

53%*

Operating Margin

15%

30%

50%*

Return on Assets

4%

12%

21%

Return on Investments

7%

16%

32%*

Click to enlarge

* - Most Recent Quarter Annualized

TRIP is the top performer when it comes to return of investments and assets. CTRP also posted a respectable ROA of 12% and an ROI of 16%. Based on fundamentals alone, TRIP appears most attractive to me.

Having developed a good idea about the fundamentals of the 3 companies, the next step was to perform relative valuation. The multiples used in the analysis were based on historical analysis of individual company and industry multiples. Multiples for TRIP were developed using industry multiples.

The table below presents the valuation analysis results.

Valuation

(EXPE)

(CTRP)

(TRIP)

Current Yr Proj EPS

$2.76

$0.98

$1.37

EPS Growth Rate

10%

16%

14%

Future EPS (5 Yr)

$4.01

$1.79

$2.34

Expected P/E

16

24

22

Price 5 Yrs Out

$64.19

$42.88

$51.44

Unlevered Beta

1.01

1.01

1.01

D/E Ratio

60%

0%

150%

Current Tax Rate

35%

18%

35%

Levered Beta

1.40

1.01

1.99

Risk Free Rate

2%

2%

2%

Risk Premium

6.00%

6.00%

6.00%

Size Premium

0.74%

0.97%

0.74%

Cost of Equity

11.2%

9.0%

14.7%

Fair Value

$37.81

$27.83

$25.90

Current Price

$33.64

$27.74

$32.45

% Overvalued

-12%

0%

20%

Click to enlarge

As shown in the table above, none of the firms on the list are significantly undervalued, although EXPE does trade below its intrinsic value. CTRP is fairly valued, and TRIP is grossly overvalued. Based on my analysis, I would buy EXPE on a pullback, hold CTRP and sell TRIP. In the long run, I would prefer holding CTRP and TRIP in my portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.