The travel and leisure industry can be very rewarding for investors looking for high returns on capital in the long term. Today, traditional offline travel agencies face the challenge of competing against the online segment, which is growing at a rapid pace. Expedia Inc. (EXPE) is the world’s largest online travel agent, providing booking services for hotel rooms, airline tickets, rental cars, cruises, package tours, and other travel products. The company, which earned $34 billion in gross travel bookings in 2012 and $4 billion revenue in 2013, operates mainly under the Expedia.com brand, but also owns several other brands. These include Hotels.com, Hotwire.com, and a majority stake in the Chinese eLong.com brand. So, let’s see why investment guru Mario Gabelli (Trades, Portfolio) was compelled to buy this company’s shares.
This online travel giant is one of the most popular companies amongst millions of business and leisure travellers alike. It provides efficient distribution of travel inventory to vendors, as well as one-stop shopping convenience to travellers at competitive prices via its brand portfolio. The firm additionally manages travel-related reservations, and given its broad reach it has become a key distribution channel for large hotel chains, airlines, and cruise lines eager to sell their travel package deals online. Expedia’s network effect, the scale of its business and the ability to cross-sell inventories through its websites are appealing features to both customers and investors, since this business model earns the company excessive returns (returns on capital for fiscal 2013 marked an outstanding 105.5%) compared to its cost of capital.
Although travel demand in the United States (59% of bookings) has been somewhat stagnant, causing a negative 1% EPS growth in fiscal 2013, the strategy of international expansion will be the key growth driver looking forward. Combined with the recent online platform upgrades, which allow a better cross-selling relationship, Expedia should be able to steal some market share of its rival Priceline.com Inc. (PCLN). Currently, Priceline posts larger figures when it comes to gross international bookings, but Expedia has been making substantial efforts to level out the playing field.
The online travel firm is looking to centre its profit strategy in the international market, as it currently accounts for 41% of Expedia’s travel bookings. The company seems especially keen on penetrating the $70 billion Asian online travel booking market, and chances are this will be the key region for stronger revenue growth (Q4 of 2013 registered a 12.50% bump). The firm’s majority stake in China’s number-two online travel agency, eLong Inc. (LONG), and the joint venture with top budget Southeast Asian airline, AirAsia, are sure to boost profits in the years to come. Despite the challenge of installing stronger brand recognition amongst international travellers via advertising campaigns, in a few years’ time Expedia could become the major go-to company for travellers across the globe.
In Europe, where leisure travel demand has been sluggish due to the economic crisis, this firm is betting on the business segment. Its latest acquisitions, the European agency Venere and German meta-search company Trivago, will help increase inventory in the western continent. Its ties with leading hotel operator Accor, added a large quantity of smaller hotels to the agency model, which will be easier to sell in a tight-pocket environment. Nevertheless, travel cancelations, delays and other habits of consumers under economic hardship could affect Expedia’s booking volume and margins. Also, Google Inc. (GOOG)’s market entry with its ITA software (offers comparison shopping for airline tickets) could put travel agencies at risk. However, I believe this firm’s efficient business model, and low costs on capital make it a sustainable long term investment.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.