Expedia (EXPE) reported fantastic numbers on Thursday in what can only be described as great news for the travel and hospitality sectors.
In fact, Expedia earnings were so good that it seems hard to believe, as it suggests anybody with discretionary income is traveling instead of doing anything else.
Room night growth grew 36% year-over-year, thanks to a 25% and 50% increase in domestic and international, respectively.
Let’s stop right there. Thirty-six percent room growth! Demand is out of control. It may be difficult to keep up at that rate in the future, but for now … amazing!
The economy is struggling, yet Expedia is booming. Go figure.
EXPE Stock Has Unrealized Upside
Gross bookings lifted 21% to $15.39 billion, of which $1.94 billion in revenue was recognized, an increase of 16% YOY.
The good news did translate to the more important bottom-line numbers, too. Adjusted EBITDA was up 13% to $469 million, operating income was up 11% to $345 million and adjusted earnings per share lifted 6% to $2.07. Net income grew 8% to $283 million.
The situation with foreign currency really impacted EXPE earnings. There was a 15% decrease in revenue per room night, but not because of demand. Much of it was due to the forex problem, which manifests as declines in revenue when foreign currency is changed by into dollars. Remember that if the dollar is strong, that means you get fewer dollars for each unit of foreign currency.
Now, while metrics like the average daily rate have been pretty strong here in the U.S., they have been struggling abroad. Here in the U.S., ADR was up 4.6% in September, and that’s about the increase it has been tracking all year. However, Expedia reported its overall currency-neutral ADR fell 6% YOY.
The adjusted EBITDA is key for EXPE, because what sets online travel companies apart from their near-extinct brick-and-mortar companions is cash flow. There just isn’t that much capex in this business, and so Expedia generated $469 million of cash flow in the third-quarter. For the first nine months of this year, operating cash flow hit $1.5 billion and free cash flow was $900 million. That cash flow is used not only to grow the business but to pay the dividend.
So this is all great news, but we have to ask if the stock is a buy.
On its own merits, EXPE stock trading up as much as $10 to $137 after reporting earnings, and is now sitting comfortably at $135. Valuation is tricky because Expedia sold its 62% stake in e-Long earlier this year, so we have to back that amount out of net income. Then we have to recognize that it spent a whole lot of money in Q2 on selling and marketing, which was unusual. So we have to look at valuation more on a cash flow basis than anything else.
Adjusted EBITDA for the TTM was $1.162 billion. Market cap is $17.7 billion, so EXPE stock trades at an EBITDA multiple of 15.2. Priceline (PCLN) is almost four times larger with a market cap of $74.3 billion and TTM EBITDA of $3.48 billion, so it trades at a cash flow multiple of 21.3.
So Expedia stock trades at about a 28% discount to Priceline. Personally, I think Priceline has the more robust operation, but it could also mean that there’s 28% upside to EXPE, if the market likes where it’s headed.
Priceline reports early next month, so you could also wait and see.
As of this writing, Lawrence Meyers has sold January $1140 naked puts against PCLN.
