1. Is the company undervalued?
EV/FCF: 4.53
EV/Sales: 1.84
Price/Book: 7.03
$EXPE is currently trading at a breathtaking 22% FCF yield, although there’s a bit of wonkiness in the trailing data. With that said, Expedia’s enterprise value is lower today than it was prior to Covid and travel demand remains robust. Throw in the fact that $EXPE has historically grown at an above market rate, makes this an idea worth exploring!
2. Can I easily explain what the company does?
Yes, they are a travel booking company. Their most notable brands are; Expedia, Hotels.com, and VRBO.
3. Does the cash flow statement line up with income statement?
Yes, cashflows have on net been higher than reported earnings:
Expedia’s free cash flow is exceptionally high due to the collection of customer deposits upfront. For example, they booked $3.2B in unearned revenue over the last 12 months. For this reason it would be unwise to extrapolate the trailing data, although it’s a promising sign of future demand.
Regarding capital allocation $EXPE spent most of their money on; buying back preferred stock, paying down debt, and capital expenditures. These moves make sense to me given that $EXPE was forced to take on significant debt after the pandemic.
4. Is the Balance Sheet Healthy?
Total Debt: $8.07B
Total Cash: $5.55B
Current Ratio: 0.89
$EXPE holds a nice chunk of debt relative to their market cap. However net interest payments last year only totaled $334M and that number should be lower moving forward. Moreover Expedia likely won’t have to refinance, as there aren’t any sizeable debt payments coming due soon:
Even baking in some bearish assumptions, $EXPE should have north of a 4X net interest coverage ratio on a go forward basis. For this reason the balance sheet is fairly solid, but definitely not great.
5. How profitable is the business?
Gross Margins: 83.5%
Operating Margins: 5.09%
Net Margins: 2.24%
These numbers are suboptimal, but investors must keep in mind the trailing twelve-month data is a bit noisy. Here’s what $EXPE has done historically:
Again the numbers don’t look great, but 2020 and 2021 are significantly dragging down profitability metrics. For instance EBIT margins were 8% in 2019. Notwithstanding Expedia is by no means a wonderful company, but not a Shitco either.
6. What is the company’s growth potential?
10-yr Revenue CAGR: 9.6%
10-yr Operating Profit CAGR: (7.13%)
10-yr FCF CAGR: 11.88%
Growth has been fairly impressive over the enterprise’s history and this has been done with relative few acquisitions, only totaling $3.1B in the last decade. Furthermore demand looks solid near term as people are chomping at the bit to travel after two years of lockdowns. Other tailwinds include business travel returning, easing of international guidelines, and gas prices finally coming down. On the other hand there’s a good chance we’re living thru a recession and that’s never good for travel. All in all I expect $EXPE to grow at an above market rate moving forward, as they’re still ~20% below pre-covid revenues.
7. Is management rewarding shareholders?
$EXPE does not offer a dividend or have a share repurchase plan in place. However management did hint on their last earnings call that a new capital return policy is all but imminent. The company also has a history of returning roughly 60% of free cash flow back to shareholders, via buybacks and dividends. I would assume $1.1B in FCF as a normalized number and $450M on net returned back to investors annually (after SBC). This works out to a 3% shareholder yield, which is pretty good for a company growing high single digits.
8. How does the company stack up against their peers?
Expedia’s biggest competitor is Booking Holding Inc. $BKNG:
$BKNG EV/Sales: 5.46
EV/FCF: 12.86
Operating Margin: 25.2%
$BKNG is much more expensive than $EXPE, but it’s a significantly higher quality business as evidenced by fatter margins and a better balance sheet. Although both companies have grown at more or less the same rate and seem heavily correlated. IMO $EXPE offers a higher potential upside, so if you’re bullish on the travel sector why not bet big?
9. What’s the counter argument?
The counter argument is that the economy is headed for troubled times and those pre-booked deposits won’t materialize into realized earnings. Additionally travel booking is a super competitive industry and $EXPE will lose market share to Airbnb, Booking, and Google.
I’m actually a bit dismissive of these arguments. I do think we’re falling into a recession, but don’t think consumers will pull back on travel spend. Particularly because Covid lockdowns are still fresh in our minds. I think it’s more likely consumers go out less frequently to restaurants, hold off on home renovations, or delay buying a new car.
Regarding competition Expedia has been in the game for over 25 years and hold mind share with customers. Of course people will shop around, but one of Expedia’s brands is almost certainly going to be priced competitively. Additionally Google and Airbnb still have unproven business models, which makes me reluctant to consider them a serious competitor.
10. Is there something I think the market may be missing?
As mentioned previously I don’t think there will be a slowdown in travel demand. Mr. Market is almost certainly pricing in a less bullish view for the stock. If $EXPE can keep growing topline at double digits, eventually the share price will have to catch up with its fundamentals.
Final Thoughts:
My base case for $EXPE would be as follows topline growing at a 11% CAGR for the next 5 years with an 8% EBIT margin in year 5. I would also expect a 3% net shareholder yield per year with an 18X EV/EBIT exit multiple at the end of year five. Unfortunately this only works out to a ~9% expected return. In fairness I’m not backing out cash for debt repayment, but even still it’s a long ways off from being compelling IMO. These assumptions are also pretty conservative and I wouldn’t be shocked if $EXPE outperforms expectations. Nevertheless it’s an investment with a wide range of outcomes and there are more interesting ideas out there, which require far less brain power to think thru.
***Disclosure: I have no position in the security mentioned above, nor do I have any plans to purchase within the next 72 hours. This article is intended for educational purposes only and in no way should be interpreted as investment advice