by Tom Taulli | April 8, 2011 10:49 am
Expedia (NASDAQ: EXPE) got its start as a skunkworks in Microsoft (NASDAQ: MSFT) back in 1996. With the surge in Internet traffic, the online division saw tremendous growth and was spun-off in 1999. Then a few years later, IAC/InterActiveCorp. (NASDAQ: IACI) bought the company.
It was part of a grand plan to create a virtual travel powerhouse. Other acquisitions included Hotels.com, TripAdvisor and Hotwire.com. But the experiment was far from successful and yet again, Expedia was spun off again.
Despite all the financial engineering, Expedia has remained a strong company. Last year, it generated $777 million in operating cash flows. So what’s the next step? Yes, it is another spin-off. This time, Expedia is going to issue shares of TripAdvisor to its investors.
And Wall Street loves it. On the announcement, EXPE stock spiked 12% in early trading.
But is there more room on the upside for investors? Let’s take a look at the pros and cons:
Valuable EXPE Franchises. Expedia.com, Hotels.com and Hotwire are mega brands. But there are also other important assets like Egencia (a full service travel management company), Venere (a hotel site with over 72,000 properties across the world) and Classic Vacations (a provider of tailored vacations). What’s more, Expedia has a majority ownership in eLong (NASDAQ: LONG), which is an online hotel and air travel service in China.
Unlocking value. While there are synergies, TripAdvisor is still not core to Expedia’s online transactions business. Besides, a spin-off should result in a better valuation for investors. In light of the popularity of content sites like Facebook and Twiter — as well as the uptick in online advertising — the TripAdvisor spin-off could reach a valuation of $4 billion or more. Keep in mind that Expedia’s market cap is $7 billion.
Expedia is Going global. There are big opportunities in foreign markets. For example, the online penetration rates for Europe and Asia Pacific are 37% and 21%, respectively. As a result, Expedia is investing aggressively into foreign markets. It has certainly been a good strategy for rivals like Priceline.com (NASDAQ: PCLN).
Social Media Threat. With the growth in social media and improved online search, Expedia is vulnerable to disruption. There are many upstart travel sites that are getting traction, like Hipmonk and Triporati. Even larger players – such as Microsoft (NASDAQ: MSFT) and Google (NASDAQ: GOOG) — are making inroads because of their meta-search technologies.
Economic Uncertainty. The travel industry is highly sensitive to changes in the economy. Even though the US is making an economic comeback, it is still fragile and the recent surge in oil prices may have a negative impact. Also, with several interest rate hikes, China is also looking vulnerable.
Partners. Expedia’s business model relies on arrangements with global distribution systems, which are sophisticated reservations platforms. But various airlines are trying to avoid the fees and go direct to their customers. This was highlighted recently with Expedia’s three-month tussle with American Airlines (NYSE: AMR). But after contentious negotiations, both sides were able to come up with an agreement.
Last year, Expedia generated $26 billion in gross bookings and processed 66 million transactions. The monthly visitors reached 61 million.
By streamlining its structure and gaining share in foreign markets, Expedia could see an expansion in its price-earnings multiple, which is now at 17. Consider that its competitors sell at much higher levels. Priceline is trading at a multiple of 49 and Travelzoo’s PE ratio is 93.
Also, as the TripAdvisor spin-off nears (it is supposed to happen in the third quarter), there should be more excitement for investors. So when looking at all these factors, the pros outweigh the cons on this stock.
Tom Taulli’s latest book is “All About Short Selling” and his Twitter account is @ttaulli. He does not own a position in any of the stocks named here.
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