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Expedia: Don't Trust Wall Street on This One

February 15, 2012 | About:
Expedia (EXPE) has been strong over the past year as investors have gotten excited about its recent spin-off of TripAdvisor. However, despite bullish analyst sentiment, in my opinion the stock is fairly valued. From a competitive standpoint, the airlines and hotels it serves are pushing back. The company is still mired in a lawsuit with American Airlines that alleges that Expedia engaged in anti-competitive practices with Orbitz to crowd out the airlines that perform the service for customers. Airlines will attempt to recapture the share of the profit pie that they lost to online middlemen like Expedia. Expedia's margins and therefore its earnings multiple could shrink if it attempts to defend its market share.

Expedia's trailing five-year valuation metrics suggest that the stock is fairly valued as there is a mixed message about the three valuation metrics compared to their five-year ranges. Expedia's current P/B ratio is 1.67 and it has traded in a range of 0.4 to 2.9 over the past five years. Expedia's current P/S ratio is 1.27 and it has traded in a range of 0.4 to 2.5 over the past five years. Expedia's current P/E ratio is 9.79 and it has traded in a range of 7.0 to 18.7 over the past five years.

The forward valuation metric is the only one that suggests that the stock is a buy. Expedia is currently trading at about $33 a share with analysts expecting EPS of $2.75 next year, an earnings increase of 6% year over year, for a forward P/E ratio of 12. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. Priceline (PCLN) is currently trading at about $530 a share with analysts expecting EPS of $29.76 next year, an earnings increase of 28% year over year, for a forward P/E ratio of 17.8. Orbitz (OWW) is currently trading at about $4 a share with analysts expecting EPS of $0.19 next year, an earnings increase of 73% year over year, for a forward P/E ratio of 19.9. Travelzoo (TZOO) is currently trading at about $26 a share with analysts expecting EPS of $1.72 next year, an earnings increase of 12% year over year, for a forward P/E ratio of 15.3. The mean forward P/E of Expedia's competitors is 17.7 which suggests that Expedia is undervalued relative to its publicly traded competitors.

Analysts do not have a history of accurately predicting the company’s results. Expedia has beat EPS estimates once in the past 4 quarters. The company's EPS figures have come in between -18 cents and 12 cents from consensus estimates or about -12.3% to 12.2% from analyst estimates. Valuation remains a concern. On a discounted cash flow basis using a 10% cost of equity shares are fairly valued at $32 apiece. This suggests that the stock is fairly valued at its current market price.

As noted earlier, the stock has been strong. Expedia is up 36.8% over the past year as bookings have come in stronger than expected. The company has some headwinds ahead of it, however, with Airlines and Hotels getting much savvier with the use of their own websites for bookings. Thus, Expedia's chief competitors are its own airline and hotel clients it serves. Until Expedia can put its awkwardness behind it, I would avoid shares.

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