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The Unexpected Future for HomeAway: Buyout

Three years ago, I asked if HomeAway, Inc. (NASDAQ:AWAY) was the ultimate travel stock. What was true then is true now, as far as the company’s financial position and overall health. However, two things have changed. I’ll discuss those in a moment along with my big prediction: the company will be acquired.

The Unexpected Future for HomeAway: BuyoutFirst, however, the company just reported earnings. Let’s examine them.

HomeAway fourth-quarter revenue increased 21.5% to $110 million from $90 million last year, and if you back out the effect of the strong dollar, it was up 25%.

AWAY’s adjusted earnings before interest, taxes, depreciation, and amortization increased 36%, from $21 million to $28.6 million. Free cash flow, which is that all-important metric I so love to discuss, was basically flat at $23.3 million.

HomeAway’s non-GAAP net income was up 100%, from $6.9 million and 8 cents per share last year to $15.2 million and 16 cents per share.

As for all of 2014, AWAY stock revenue increased 29% to $447 million from $346 million in 2013, with no real difference accounting for currency.

AWAY stock adjusted EBITDA increased 23% from $96.7 million to $119 million. Free cash flow increased 26% from $93 million to $117 million. Non-GAAP net income increased 20%, from $49.8 million and 56 cents per share to $64.4 million and 67 cents per share.

HomeAway remains a popular method for listing vacation housing. Listings increased 17% and average revenue per subscription listing during the fourth quarter was $477, with a 71.7% renewal rate. Visits were 177.6 million during the fourth quarter, an increase of 21.7%.

AWAY stock has $813 million in cash, no long-term debt, and $316 million in senior convertible notes. I’ll consider that $500 million in net cash, or about $5 per share in cash. That puts the effective stock price at $26.38, or about 30x fiscal year 2015 estimated earnings.

AWAY stock is a bit pricey here, but not unreasonably so considering it is a growth stock. However, I’ll tell you why you may want to buy in, outside of the fact that it’s a good business.

I think it is going to get taken out. Furthermore, I also think it will get taken out by either the same player, or a similar one, that eventually buys out Airbnb.

Yep, I’m predicting that at some point after the Airbnb IPO, both of these companies are going to be swallowed up. They may even merge first before another party gobbles them up.

The companies aren’t exactly competitors. HomeAway’s CEO says there’s only 2% overlap between the two. HomeAway caters more to homes for rent while Airbnb is for any Joe with an apartment. The businesses are synergistic if combined, but not necessarily direct competitors. Only after the Airbnb IPO will we really know how much money it’s making.

Yet there are even larger gorillas in the jungle, with lots and lots of money. First, never dismiss private equity buying out either or both companies. The more likely buyers, however, will be either Priceline Group Inc (NASDAQ:PCLN) or Expedia Inc (NASDAQ:EXPE). Both have made incredibly foolish purchases and overpaid for them.

The thought that either might spend a lot of money on a really great business makes sense. Both lodging companies would fit perfectly into the online travel booking business models.

I’ll even suggest yet another potential suitor — any hotel company with enough capital. Hotels are on fire right now and will be for some time. They are going to make a lot of money, generate a lot of cash, and set up a lot of credit facilities.

Now, at some point, the hotel cycle will shift. The wise operators will begin to shed assets instead of buy them, and that’s when I think they’ll use the cash from those sales to scoop up one or both companies, if they are still around.

I think you buy HomeAway here for some modest appreciation, with an eventual buyout.

As of this writing, Lawrence Meyers has sold Jul $1,030 naked puts against PCLN.

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