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Expedia (EXPE) - An Einhorn Pick I Like
Posted by: Federico Flom (IP Logged)
Date: May 18, 2012 10:06AM
Intro: Expedia Inc. is an online travel company. The Company makes available, on a stand-alone and package basis, travel products and services provided by numerous airlines, lodging properties, car rental companies, destination service providers, cruise lines and other travel product and service companies. It also offers travel and non-travel advertisers access to a potential source of incremental traffic and transactions through its various media and advertising offerings on both the TripAdvisor Media Network and on its transaction-based websites. The company’s portfolio of brands include Expedia.com, Hotels.com, Hotwire.com, TripAdvisor Media Network, Expedia CruiseShipCenters, Egencia, eLong Inc. (eLong) and Venere Net SpA (Venere). In February 2011, TripAdvisor, an operating company of Expedia Inc., expanded its mobile travel offering with the acquisition of Palo Alto, California-based EveryTrail. In November 2011, Renren Inc. sold eLong Inc. to Expedia Inc.
Renowned hedge fund manager David Einhorn reported his first quarter portfolio. In the first quarter, he sold a lot more stocks than he bought. He got into Howard Marks’ company Oaktree Capital (OAK), which came to the market a few weeks ago through IPO. Einhorn is heavy in the technology sector, which is almost half of his holdings. He bought into more tech companies such as Computer Science (CSC), Expedia Inc. (EXPE), DST Systems (DST).
Last quarter results
Expedia Inc. flexed its muscles in ways not seen in years as the online travel-booking company’s shares climbed to a record following a quarterly report that was driven by strong gains in hotel-room bookings. The company reported a fiscal first-quarter net loss of $3.3 million, or 2 cents a share, on revenue of $816.5 million. During the same period a year ago, Expedia earned $52 million, or 37 cents a share, on $727.8 million in revenue in the year-ago period.
RBC Capital lifted its price target on shares of online travel company Expedia Inc. to $43.00 from $34.00, while maintaining its "Outperform" rating on the stock.
"Our positive view on Expedia is based on accelerating growth on the back of the platform upgrade in 2012 and eventually margin expansion in 2013," RBC wrote in a note.
The brokerage noted that EXPE reported stronger than expected results in first quarter 2012, with bookings and revenue 4 percent and 6 percent ahead of its estimates, respectively, and adjusted EBITDA 25 percent ahead of its and consensus estimates.
Transaction growth rates showed solid trends, with room night growth continuing to accelerate, especially in the US market. The acceleration was broad-based across several Expedia properties and even showed early contribution (a sign of things to come) from Expedia.com's hotel business, RBC said. RBC introduced 2013 EPS estimate of $3.75, while raising revenue and EBITDA estimates for 2012.
Bank of America also raised their price target on shares of Expedia from $38.00 to $43.00 in a research note issued to investors on Friday. The firm currently has a “neutral” rating on the stock.
The analysts wrote, “Expedia is an investment in global Online travel with exposure to hotel, air and rental car bookings in the US, Europe and Asia. With 3 strong transaction brands including Expedia, Hotels.com, and Hotwire, and its additional exposure to Asia through ownership in eLong and a joint venture with Air Asia, Expedia should benefit from an increasing percentage of travel bookings migrating Online. We expect 8-10% growth in normal travel markets, and we see a 10-16x P/E multiple as reasonable.”
A number of other analysts have also recently weighed in on EXPE. Analysts at JPMorgan Chase (JPM) upgraded shares of Expedia from an “underweight” rating to a “neutral” rating in a research note to investors on Friday. They now have a $37.00 price target on the stock, up previously from $31.00. Separately, analysts at Nomura (NMR) reiterated a “neutral” rating on shares of Expedia in a research note to investors on Monday. Finally, analysts at Cowen initiated coverage on shares of Expedia in a research note to investors on Tuesday, April 10. They set an “outperform” rating on the stock
My strategy short term strategy on EXPE shares considering current volatility
Expedia Inc closed Thursday's trading session at $41.10. In the past year, the stock has hit a 52-week low of $23.85 and 52-week high of $43.92. Expedia stock has been showing support around $39.55 and resistance in the $41.91 range. Technical indicators for the stock are Bullish and S&P gives Expedia a neutral 3 STARS (out of 5) hold rating. For a hedged play on Expedia , I am looking at the Jul '12 $41.00 covered call for a net debit in the $38.55 area. That is also the break-even stock price for this trade. This covered call has a duration of 70 days, provides 6.20% downside protection and an assigned return rate of 6.36% for an annualized return rate of 31.78% (for comparison purposes only). A lower-cost hedged play for Expedia would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the Expedia Jan '13 $30.00 call and selling the Jul '12 $41.00 call for a total debit of $9.80. The trade has a lifespan of 73 days and would provide 3.16% downside protection and an assigned return rate of 12.24% for an annualized return rate of 61% (for comparison purposes only).
Reasons I am bullish
One of the big reasons I am bullish is the change that management has made in the past year. Management is committed to making the international segment grow and increase the revenue ex-U.S. As part of its growth initiative in Europe, Expedia acquired Venere, a European agency business. This was followed by the introduction of the Expedia Easy Manage Program, which brought on board a large number of smaller hotels under the agency model. Since the agency model typically brings in lower margins and the company's service commitments are also lower, the way to win with the model is through volume. It is important to remark that the Asia strategy took off with the acquisition of a stake in eLong, one of the largest online travel companies in China. Management plans to build its infrastructure in China over time, as there is significant scope for growth in the region.
I view its go-slow strategy positively, considering the number of home-grown Chinese players (CTRP for example) government support for which will be great. More recently, the company acquired a local Vietnamese ecommerce company (PeaceSoft) that is expected to help it grow in the region. On the airlines segment, Expedia has been building relations with local Asian operators and has announced a number of partnerships that should be valuable going forward.
Another very positive trend in recent times is the improvement in the average daily rate (ADR). Since the industry was severely impacted by the recession, Expedia was forced to cut booking fees and average daily rates for hotel rooms took a tumble. However, the trend reversed in the first quarter of 2010, when the ADR growth rate was flat compared to the year-ago quarter. It picked up slightly in the second quarter and more substantially in the third and fourth. Growth rates continued to strengthen through 2011. This is a very encouraging trend, since it will help improve both revenues and margins.
Expedia's current earnings multiple is 15X, compared to the 65.3X average for the peer group and 14.7X for the S&P 500. Over the last five years, the company's shares have traded in a range of 6.8X to 31.7X trailing 12-month earnings. The shares appear cheap compared to its peers.
The shares also appear cheap since they are trading at a forward P/E of 13.4X compared to an 87.0X multiple for the peer group. I think the market is underestimating EXPE future growth potential.