Expedia's Total Yield Of 13.3% Will Propel Its Stock Value Higher
Summary
- Expedia is on an accelerated buyback program, buying up to 29 million of its shares, or 20.7% or so of its total 140 million outstanding.
- I estimate the company's value is at least $115.22, an upside of 22%. On the upside, it could be worth as much $130.52, or 38%, higher.
- All of this is fueled by its huge free cash flow. The company's recent restructuring, losing 3,000 workers, will help towards the growth in free cash flow.
- This an update of my previous article three months arguing that the stock is severely undervalued.
- This idea was discussed in more depth with members of my private investing community, Total Yield Value Guide. Get started today »
Expedia's Massive Buybacks Will Help Push Up the Stock
I argued in my article on December 3, 2019, that Expedia (NASDAQ:EXPE) stock is very undervalued. The company had just fired its CEO and CFO and announced a new 20 million share buyback program. I believe that EXPE stock is now worth between $115.22 and $134.50 per share, or an upside of 22.4-38.4%. This article updates my previous analysis.
This was on top of the 9 million share buyback program. Keep in mind that this is one of the few stocks that actually targets the number of shares to be repurchased. As a result, we can monitor the buybacks carefully.
Buybacks Galore
At the end of Q3 2019, there were 145.5 million shares outstanding. On balance sheet date of 12/31/19, there were 142.999 million shares outstanding. On the filing date of 2/13/20, there were 139.989 million shares outstanding.
(Source: Hake calculations)
So, in the space of fewer than 3 months, Expedia has bought back 5.5 million shares, or 3.8% of its shares outstanding.
The company is well on its way to completing the buyback program. In fact, at this rate of roughly 5.5-6 million shares over 3 months, the 29 million shares program could be completed in around 4 more quarters.
You can see in the chart I put together below that Expedia has been accelerating its buybacks in the past year.
(Source: Hake, using Seeking Alpha data)
This shows that the company has bought back almost 8% of its shares in the past three years. But most of that was in the past year.
In fact, you can see this in the chart below:
(Source: Hake, using Seeking Alpha data)
Free Cash Flow Abounds
And why shouldn't it do so? EXPE generates sufficient free cash flow to pay for these buybacks. You can see this in the table below, which shows a rolling last 12 months ("LTM") measure of FCF and buybacks:
(Source: Hake)
So, on average, about 52% of the FCF generated on an LTM basis is used for buybacks. And there is plenty of FCF to pay both the dividends and the buybacks. You can see this in the table below:
(Source: Hake)
This shows that in each year, there is enough FCF to pay for both the dividends and the buybacks.
Do I even need to say any more? This is a very interesting value play. Yes, the coronavirus will lower the company's FCF. But will the dampening effect of the epidemic really last the whole year? I doubt it. There is plenty of room in the company's FCF cash flow to pay for the buybacks and dividends.
For example, let's say there is a 10% hit to FCF for the year 2020. That would put FCF at $1,446 million for the year. Let's say buybacks continue at $350 million or so per quarter. That would cost $1,400 million. The dividends would cost $200 million or so.
So, Expedia would have an FCF deficit of just $150 million or so. But would that matter? The company has $3.84 billion in cash and securities on its balance sheet.
What is EXPE Stock Worth?
Using the same model as in my previous article, I estimate that the stock is worth between $115.22 and $134.50 per share, or an upside of 22.4-38.4%. You can see this in the table below:
(Source: Hake)
The way to understand this is as follows: In the first column, it assumes that 50% of the 29 million in buybacks are completed. That would bring the shares outstanding to 125.5 million.
The expected dividends of $208.8 million include a 4.4% dividend rate increase. This is the average of the dividend increase per year for the past three years.
So, taking $208.8 million and dividing it by 125.5 million shares results in a $1.66 dividend per share annually. Then, dividing $1.66 by 1.44% results in a stock price of $115.42 per share. This represents upside of 22.4%.
Now this figure assumes that 29 million shares are bought back and 50% are completed within one year or so. That seems doable, since, as I have shown above, the company has already bought back almost 6 million shares in the past six months. Half of 29 million shares is 14.5 million. That implies that it might reach the stock valuation after one year. And if the whole 29 million shares are bought back, it might take more than two years.
One risk with this valuation analysis is whether the dividend yield stays at the present level of 1.44%. If the yield rises, the valuation will be lower. But I don't believe this will happen. You can see why in the chart below:
(Source: Hake, using Seeking Alpha data)
This shows that the median dividend yield in the past 9 years is well below the present average yield for 2020 of 1.21%. But the yield today is even higher at 1.44%.
So, if you believe in the reversion to the mean, the likely result is that EXPE stock will move to a lower yield. That is good, since it increases the probability of the valuation I estimated above coming true.
Summary and Conclusion
Expedia stock is very undervalued. I estimate that it has a total yield of 13.3%:
(Source: Hake estimates)
The 1.44% dividend yield plus the buyback yield of 11.85% brings about a 13.3% total yield. Based on my estimates, the stock is worth between $115.42 per share and $134.50 per share over the next two years. The large share buybacks, fueled by the company's ample free cash flow, will push the stock to those target levels.
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Comments (18)
And we see the big con , literally that agency model pulls on the customer.Being just a middle man for hosts from many countries when a disaster hits and you have to cancel, booking takes no responsibility for the host or taking the reservation! For example they can do nothing If a host refuses to refund your credit card . All they can do is kick them off the platform.
Booking won't fight for the customer as they wash their hands of the transaction like a middle man Pontius Pilate!Merchant model on the other hand makes Expedia your advocate and partner. Airbnb is also like this.So when tough times hit or a problem arises who is better for the customer? I say Expedia.
it is laying off people and spending most of its cash flow on buybacks ?
Nope, I don't buy it.
Ouch! Jumped into CCL too soon. Dividend is OK, so I have that.
