The Internet revolution did more than create amazing new business models — it killed several old ones. In the old days, you had to call a travel agent, hotel, rental car company or airline directly to book a reservation. Then the Internet came along, and with it came aggregation of travel bookings via websites like Expedia (NASDAQ:EXPE).
Travel agents at all budget levels saw their business vanish. Airlines closed down ticketing offices. Customer service phone centers were sent abroad. Companies like Expedia made a lot of money. The questions are: Do they still? And will they continue to do so?
The Expedia brand has since expanded to include Hotels.com, Hotwire.com, the TripAdvisor Media Network, Expedia Affiliate Network, Classic Vacations, Expedia Local Expert, Expedia CruiseShipCenters, Egenciatm, eLong, Inc., and Venere Net SpA. The key word here is “brand.” Expedia, like Priceline.com (NASDAQ:PCLN), has become a household name. It is the go-to website to purchase travel. That brand name has a lot of power behind it.
But don’t mistake that for invincibility. All that’s required to knock Expedia off its perch is a better user experience. How long before Google Travel becomes a reality? Maybe never. But “maybe” is a tough word to hang a business model on.
Expedia poses another huge potential risk. The 2008 financial crisis devastated the travel and leisure industry. The decline in revenues went across the board. The cuts went deep, even deeper than post-9/11. That’s why Expedia lost a whopping $2.5 billion in 2008. If we are headed for a double-dip recession, Expedia will get slammed again, and slammed hard.
In addition, a post-recession recovery takes time. 2009 profits were a modest $300 million, and in 2010, the company had net income of $421 million. So far this year, the company has added $193 million to its coffers.
What do analysts expect? They forecast earnings to be up 15% both this year and next, and around 12% annually thereafter. This, of course, assumes no recession. That level of growth makes the stock potentially attractive. It means Expedia is trading at a P/E of 14 on this year’s earnings, suggesting the stock is fairly valued. But let’s check on financials before we make any decisions.
The company carries $2.3 billion in cash, offset by $1.65 billion in debt, or about $2.40 per share in net cash. Debt service is at a 6% interest rate, so it’s definitely able to meet interest payments. Free cash flow appears to be relatively strong at $870 million over the trailing 12 months. The company pays a negligible dividend of 1.1%. Insider holdings are a positive: They account for about 20% of the stock. That means management’s interests are aligned with shareholders, and that impresses.
Conclusion
Backing out the net cash, Expedia effectively trades at $24.50 per share, or a net cash-adjusted P/E of 13. You basically have two ways to go with Expedia, and I think it depends entirely on what you believe will happen with the economy. If you believe we will avoid a double-dip recession, it’s a good addition to the growth portion of a diversified portfolio. If you think we’re headed back into gloomy times, then Expedia will be a short. The company lost 80% of its value in 2008, so buyer (and short-seller) beware.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.
