Given the recent appreciation following Q2 2012, in which Expedia (EXPE) beat analyst expectations for both revenues and EPS, the company has limited upside remaining at current earnings. The company, nonetheless, has a strong free cash flow position and is less affected by economic conditions as compared to the industry leader, Priceline (PCLN). Expedia is taking new initiatives to maintain growth.
Financial Performance and New Initiatives:
Expedia recently acquired VIA Travel (the largest travel management company in the Nordic region) and Traveldoo, in line with its growth strategy. It continues to expand its services to more countries like Costa Rica and Venezuela, and it continues to enter into partnerships with airlines like Alaska Airlines. Like Priceline, the biggest source of revenue for EXPE is hotel bookings (78% of revenues), which were up 16% in 2Q2012.
Gross bookings increased by 13%, while revenues grew by 14%, 2% of which were due to VIA Travel.
Via Tarvel also led to a 3% increase in air tickets sale. International bookings make up 38% of Expedia's worldwide bookings as compared to Priceline's 78%. Therefore, Expedia is a little less affected by the European economy as compared to Priceline. This is why PCLN has a beta of 1.9 versus EXPE's 0.97. Expedia is a safer option during economic uncertainty, as Priceline recently gave a weak Q3 outlook. The earning surprise for Expedia was 25% in the last quarter, as compared to Priceline's 6.7%
Expedia recently introduced upgrades and new features for its hotel mobile app, based on studies of mobile travel bookers' habits. For more details of the study, see the news release. The app now provides exclusive discount deals at more than 2,000 hotels across the world. This move is in line with the growing trend of using mobile devices like smartphones to make hotel bookings. Expedia is not alone in its emphasis on mobile apps, since Priceline too has taken steps, like giving more flexibility to customers regarding the time that they book their hotels.
The total debt-to-equity ratio is 58%. The long-term debt in the form of senior notes matures in 2018 and 2020. Interest coverage ratio of almost 7 shows that the company's earnings can easily cover interest payments. The operating cash flow and free cash flow continue to increase every year, while cash and cash equivalents stood at $2.4 billion at the end of the last quarter. It also has a $727 million credit facility available.
The company also pays dividends and repurchases shares. The dividend yield is almost 1%, but there is room for growth, as the free cash flow yield (trailing twelve months) is 12%. The YTD share repurchase is $8.8 million or 3 million shares, which leaves 20 million to be repurchased in the future under the current repurchase plan.
The forward P/E for Expedia is 15x as compared to Priceline's 17x and Orbitz's (OWW) 7x. The average P/E for Expedia is 14x over the last 5 years. The valuations using the forward and average multiples are:
*2014 EPS were calculated by using the long-term earnings growth rate for EXPE of 12%.
The short ratio is 2 days, with 11% of the float being short. The stock is trading at a discount of 14% to its 52-week high of $60.
We recommend a hold position for EXPE because of the recent appreciation from $44 at the end of July to $52 at present. Investors can wait for a better entry point. We believe that once the economy gets better, especially in Europe, Priceline will be a better option considering that it has a larger exposure to international operations (78% of revenues) and can grow more rapidly.