Expedia Stock Pitch

My take on Expedia...

Expedia Stock Pitch (EXPE – 3/1/2017) – $120.54 (All data recorded on the above date)

Buy Expedia!!!

Expedia is an online travel agency that allows customers to book hotel rooms, vacation rentals, air tickets, rental cars, cruises, and more. The company operates under many brands, including Expedia.com, Hotels.com, Travelocity, Orbitz, Wotif, AirAsia, and HomeAway. When judged by total bookings Expedia is the largest online travel agency. As of the end of 2016 they have a 6.4% market share.

Value:

P/E (TTM) – 26.4 P/E (Fiscal Year Ending 12/31/17) – 21.9 PEG – 1.29 Discounted Free Cash Flow – $177 

Expedia (EXPE) trades at 26.4 times trailing twelve-month earnings compared to 20.6 for the S&P500, an industry TTM average of 25.6. In addition, EXPE trades somewhat expensively relative to the company’s growth rate with a PEG ratio of 1.29, but is cheap when compared to future cash flow.

Growth and Future:

Next Fiscal Year EPS Growth – 20.5% Projected 1-Year Revenue Growth – 14.1% Projected 3-Year Revenue Growth – 43.4% 

The travel agency industry is highly fragmented and Expedia is constantly taking market share. Being able to capture an increasing piece of the pie gives the company a great growth rate because they are less reliant on industry trends. Morningstar projects that their market share will be in the high single digits by the end of the decade giving way for some solid gains.

Additionally, Expedia recently sold their stake in eLong, a Chinese version of themselves, and instead formed a collaboration with CTrip. China is a rapidly growing market as there is a growing middle class that will have more disposal income for travel and leisure. Expedia is positioning themselves well to benefit from this market opportunity.

The most exciting development in my opinion is the recent acquisition of Homeaway. Homeaway is an online vacation rental service that allows users to rent full homes or condos. This is a rapidly growing market with players such as Airbnb and Homeway capturing on the opportunity. Here is an excerpt from their latest quarterly conference call “We are on track financially with $163 million of adjusted EBITDA in 2016 and a very aggressive investment plan in 2017, on our way to the $350 million EBITDA target in 2018.” The company is clearly going to invest in capturing this growing market. In addition, more than doubling earnings before interest, taxes, depreciation, and amortization (EBITDA) in only two years time is incredible.

Another major trend working in Expedia’s favor is the shift towards experiences, not material goods. This trend is especially prevalent in millennials and as their disposable income increases in coming years this should boost the overall travel industry.

Dividend:

Project Dividend/Yield – $1.12 / 0.94% 1-Year Dividend Growth – 16.67% 

Past Performance:

ROE – 4.6% 

Fair Value:

Giving the company a valuation more in line with its peers at 25.6 and using the consensus estimate of $5.82 for 2017 we arrive at Expedia’s fair value estimate. This implies a 12-month share price of $148.99 and upside of 23.6%.

Barron’s recently wrote positively on the stock saying there was 25% upside. They valued the company by using cash flows and giving them a 21 times 2017 estimate of $7.25 a share in free cash flow.

Lastly, Expedia is showing solid growth and should be consider a long-term play with much of its upside in significantly higher earnings and cash flows in the out years.

When To Sell:

Sell Expedia based on shifts in the competitive environment. Watch for large, well-capitalized companies, such as Google and Amazon to potentially enter the market and crush gross margins. Expedia has a relatively narrow economic moat based on their network of hotels and technology, however that moat can be crossed by a large player willing to spend heavily

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Submitted March 08, 2017 at 10:50PM by Gthom9 http://ift.tt/2n19D5v