Following the most recent quarterly results, investors in Expedia (EXPE) suffered through the worst one day share loss in the company’s history, roughly $40 representing a 27% decline. However, I contend that the company has a narrow moat, and despite numerous analyst downgrades, the stock is still considered to be trading well below fair value. The headwinds, while not to be ignored, appear to be manageable.
Just how bad are things over in Exepdia land? Is the sharp sell off a harbinger of things to come, or does it represent a manic-market buying opportunity? In this article, I endeavor to present the pros and cons of a prospective investment in Expedia, concluding that the long argument holds more water.
There Is No Doubt, The Headwinds Are Real
The cause of Expedia’s misfortune was twofold: First, the quarterly earnings report missed on revenues, the $3.56 billion estimate fell short by $10 million, and EPS missed by $0.43 cents. EBITDA was flat versus a year ago. There were quite a few other metrics that looked less than stellar.
Perhaps of greater concern, and I would argue it’s the real cause of the precipitous decline, was the move by Google (GOOG) to give its own vacation rental and apartments business preference in Google search.
During Expedia’s earnings call, management cited “weakness in SEO volumes and a related shift to high-cost marketing channels.” For those unfamiliar with the parlance, the executive was speaking of Search Engine Optimization. More specifically, Google is highlighting their own offerings at the expense of firms like Expedia. This, of course, results in less business heading Expedia’s way and translates into poorer results in the most recent, and potentially, in future quarters. Furthermore, to make up for the lost clicks, Expedia must spend more on marketing with the consequent negative effect on the company’s bottom line.
Kevin Kopelman, managing director and analyst for Cowen, notes online-travel companies provide poor disclosure on their SEO exposures. Kopelman calculated that should SEO revenue fall to zero (zero being the operative word), Expedia would lose 50% of Ebitda.
Look no further than Vrbo for a possible example of how weak SEO volumes drove Expedia’s poor results. That segment saw net income growth slow to 3 percent to $215 million. That doesn’t sound too bad until one learns that’s compared with a 66% increase the year prior.
Following the poor quarterly results and the discovery of the root cause, the dominoes began to fall. Analysts downgraded Expedia by significant margins:
Piper Jaffray’s Michael Olson lowered his price target to $124 from $160.
D.A. Davidson analyst Tom White price target dropped to $130 from $162.
Wells Fargo’s Brian Fitzgerald lowered the price target to $125 from $160.
Aside from the very real Sturm und Drang, with discussions of inverted yield curves, trade wars, and Brexit, prospective investors in Expedia must consider the cyclical nature of the company in the event of a slowing economy.
Is There Hope In Sight?
Amidst all the bad, I think investors lost sight of the positives: Expedia grew EPS by 16% last year. Although Expedia adjusted the company’s Ebitda forecast markedly downward, the company is still modeling an increase of 5% to 8% for 2019.
Despite the aforementioned slowdown in Vrbo, that segment still experienced revenue growth of 14%. Vrbo, far from a failure, provides Expedia the leading share in the fast-growing online vacation rental market.
Morningstar predicts Expedia’s global share of the total travel booking market will climb to 6.8% in 2023 from 5.9% today. Argus projects Expedia’s share of the global travel bookings will increase form 25% in 2016 to roughly 33% in 2020.
Expedia reported solid 9% third-quarter bookings growth in the face of a travel industry demand slowdown.
The firm is steadily gaining market share in the US. Expedia now garners approximately 60% of bookings, representing a two-year booking increase of 23%.
The aforementioned is not indicative of a moribund company.
Morningstar analyst Dan Wasiolek estimates the company will have to raise the company’s marketing budget by a sum equal to 2% of sales to combat the SEO loses. While 2% is small as percentages go, it represents a large sum in terms of real dollars. Nonetheless, it is not indicative of company in crisis.
There Are Tailwinds Around The Corner
Gazing into the not too distant future, the International Air Travelers Association forecasts an annual passenger growth rate of 3.5%, which will lead to a doubling in passenger numbers by 2037. At the same time, Skift forecasts International travel will increase by 500 million trips in the next decade. Ironically, the aging population and millennials may present a sort of tag team for Expedia. Baby boomers will create a boom in traveling while millennials will lead the trend in booking travel online.
Global travel is the seventh largest industry and second fastest growing behind banking.
Expedia is not a one trick pony. The firm has 19 online travel sites. Expedia has a presence in 30 countries. Hotels.com boasts 90 websites in 41 languages while the company now possesses the largest stock of rentable homes on the globe. And that’s just the highlights.
I’d add that instead of looking at the drop in target prices presented by the analysts listed above, one should look at the actual price targets. The average of the three represents an approximate 33% gain from today’s closing price.
Expedia trades today at roughly 14 times forward earnings. Should the stock regain half the ground toward its historical multiple of 20, let’s say a multiple of 17, investors would be looking at a significant gain.
Dividend Metrics
EXPE has a secure dividend with a (TTM) payout ratio of roughly 38% and a dividend coverage ratio of approximately262%. The current yield is approximately 1.4%.
The three, and five-year dividend growth rates stand at roughly 14% and 17% respectively.
(All dividend metrics gleaned from Schwab)
Moat and Management
Expedia has a narrow moat derived from the company’s large footprint in the online travel industry. Examples of the firm’s strong presence are the fact that the company garners at least 35% of the global online travel agency booking market, Expedia’s ranking as the top-10 travel iOS mobile application in 19 countries, and the core Expedia platform boasting over 1 million properties.
Expedia has a solid management team. The company’s history of acquisitions served the company well and are testimony to management’s expertise. However, the spin-off of leading metasearch platform TripAdvisor followed by the acquisition of Trivago appears to have been a misstep.
Financial Strength
Morningstar and Argus rate the company’s financial health as moderate.
The company increased cash and cash equivalents markedly over the last few quarters.
Fair Value
As I compose this article, EXPE trades for $95.01 a share.
Morningstar has a FV for the company at $170, CFRA values the shares at $99.72, Argus has a target price of $160 and Credit Suisse has a target price of $159.00.
I should add that Argus set the price target in July of this year. It is unknown as to whether the analyst’s opinion differs now that the 3Q results have been released. I suspect to see a modest downgrade of the price target from that source in the future.
My rating system provides a score of 30/46. For an overview of my rating system, see the section near the end of the article.
My Perspective
I consider EXPE a Buy. Perhaps I should exercise more caution, but my experience with companies that were pronounced dead due to supposed threats by Amazon (AMZN) only to have the shares bounce back big has me seeing this as a similar scenario. For me, this is an opportunistic move, and I will likely treat this as a trade rather than a long-term investment. I recognize the company must overcome a serious hurdle in terms of the Google issue, but I do not see that as an existential threat. From my perspective, the company is simply undervalued by a wide margin. I had no investment in Expedia and only entered the trade after investigating the company for this article. I believe we are witnessing a manic-market over reaction.
Rating System
I rate EXPE at 30/46, a high score for valuation and a solid score for the overall quality of the company. The first number represents the FV of the company and measures six valuation metrics. The highest FV score possible is a 30.
The second number represents the overall score of the company. This takes into account the moat, management, past and projected growth rates, financial strength, historic ROIC, and valuation of the company. The highest score possible is a 65. A score in the 50s is rare.
The rating system is far from foolproof; however, my initial testing (it has been in use for a year) indicates a combined score of 25/41 provides investment targets that often outperform the market.
The overwhelming majority of companies score far below 25/41.
One Last Word
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Additional Information
I have no formal training in investing. All articles are my personal perspective on a given prospective investment and should not be considered as investment advice. Due diligence should be exercised, and readers should engage in additional research and analysis before making their own investment decision. All relevant risks are not covered in this article. Readers should consider their own unique investment profile and consider seeking advice from an investment professional before making an investment decision.
Disclosure: I am/we are long EXPE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.