Investors had a cursory glance at the US economy’s mildly disappointing 2.2% growth rate in the first quarter, then hurried on to more pressing business. That would be the business of deciding how much to pay up for earnings that have broadly exceeded expectations.
Some three-quarters of the S&P 500 companies reporting so far have posted positive surprises, and more impressively still they were, as of last week on pace for year-over-year earnings growth just shy of 10%, well ahead of the 2% consensus forecast.
As discussed here a week ago, the global economy of the multinationals overlaps only coincidentally with the national accounts measured by GDP reports.
The online travel marketer’s stock has been up as much as 30% to an all-time high this morning after it reported adjusted earnings of 26 cents a share, vs. the consensus estimate of 15 cents a share. Revenue rose 12% in a year’s time, also beating expectations. Plumping the growth was the 24% surge in the number of hotel nights booked through the various corporate sites, notably through Hotels.com and Hotwire.
I’m kicking myself here, because I haven’t given Expedia much thought since recommending it in January of last year, when it could have been had 38% cheaper. I returned to Expedia’s inexpensive earnings multiple in December after singing the praises of its TripAdvisor (TRIP) spinoff, but didn’t buy then either.
Another chance came and went yesterday after what should have been the dead giveaway of very strong results from Starwood Hotels (HOT), the operator of Westin, Sheraton, and other major brands. And it wasn’t just the strong results or the stock’s 4.4% pop to a new ten-month high, but this quote from the CEO: “Seemingly unstoppable demographic and economic trends are fueling global growth in demand for high-end travel.”
It’s not too late to get in, no matter how daunting the big jump in Expedia’s shares might make it. It’s not just that studies old and new have shown that stocks jumping on earnings surprises tend to outperform the market from there.
It’s also the fact that even after its big jump, Expedia sells for less than nine times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization), while growing at a double-digit rate. And that measure of cash earnings was up 23% year-over-year in the latest quarter.
All this implies a cash earnings yield of at least 10%, at a time when the ten-year Treasury note yields less than 2%. That makes Expedia a steal even after Friday’s takeoff. And that’s also why the GDP data earned a shrug.