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Expedia Is in Search of Europe's Growth

Victor Selva

Victor Selva

9 followers

Expedia Inc. (EXPE) is one of the world's largest online travel services companies. Businesses include Expedia, Hotels.com and Hotwire. In December 2011, Expedia spun off TripAdvisor (TRIP) as a publicly traded company.

In this article, let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

Successful Models and Technology Platform

Models developed by management help to study customer behavior as a predictor of future behavior and spending patterns with the aim to increase the choices offered to consumers. The wealth of choices helps attract more customers, which in turn generates revenue growth and margin expansion.

Due to the rapid increase in its international regions, the firm is in process of transitioning Expedia brands to a new global technology platform.

China and Asia Have Become a Priority

In June 2008, EXPE acquired Italy's Venere, with a focus on European lodging reservations, and this has aided the company's international operations. This was followed by the acquisition of German metasearch company Trivago.

In May 2010, the company completed multiple transactions to materially increase its economic stake in eLONG, one of the largest online travel companies in China. The following year, it took further actions to increase its interest on it.

In March 2011, the firm announced a joint venture with AirAsia, a leading low-cost airline in Asia, to better pursue growth opportunities. Also it acquired a local Vietnamese ecommerce company (PeaceSoft).

Finally, on March 2013, it acquired 62% of Europe an hotel search company trivago, in a deal valued at $632 million in cash and stock.

Marketing Campaigns

Expedia develop a strong marketing campaign to establish the brand in Europe. It is currently in the middle of a major campaign that includes TV, online and social media ads.

Analyst Recommendation

The firm is currently Zacks Rank # 3–Hold, and it also has a longer-term recommendation of “Neutral”. A Hold rating indicates that the stock, over the next 1 to 3 months, will perform at an annualized rate of 10.56%, very similar to the S&P 500. For investors looking for a better Zacks Rank, Bitauto Holdings Limited (BITA), E-Commerce China Dangdang Inc. (DANG) and Vipshop Holdings Limited (VIPS) could be better options.

Relative Valuation, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 43.1x, trading at a premium compared to the industry mean. Earnings per share (EPS) has increased in the most recent quarter compared to the same quarter a year ago, $0.7 per share for the fourth quarter. In the next graph we include the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance had an upward trend over the last five years.

1397170634594.png

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased from the same quarter one year prior. This is a clear sign of weakness within the company.

Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

EXPE

Expedia

10.85

BITA

Bitauto Holdings

13.68

DANG

E-Commerce China Dangdang

-60.02

VIPS

Vipshop Holdings Limited

-11.47

ASUR

Asure Software, Inc.

-39.41

MWW

Monster Worldwide, Inc.

-0.06

CTRP

Ctrip.com International, Ltd.

11.70

The company has a current ratio of 10.85% which is higher than the ones registered by E-Commerce China Dangdang, Vipshop Holdings Limited, Asure Software, Inc. and Monster Worldwide, Inc. But for investors looking for a higher ROE, Bitauto Holdings and Ctrip.com International, Ltd. (CTRP) could be better options.

Final Comment

Models to better understand the behavior of its customer base and acquisitions to increase inventory all over Europe are catalyst for the online travel company as well as it marketing campaign in that continent. For these reasons, I feel bullish on Expedia.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in the fourth quarter of 2013. Gurus like Mario Gabelli (Trades, Portfolio), Jim Simons (Trades, Portfolio), Louis Moore Bacon (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) have taken long positions on it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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