My 'first look' analysis of Expedia
Coming back to a stock with some strong attention from my readers...
In my September 19 e-mail, I asked readers which of the following stocks recently on my radar that they most wanted me to take a closer look at: software maker Adobe (ADBE), online travel company Expedia (EXPE), or global cosmetic maker Estée Lauder (EL).
Adobe was the clear favorite, so I analyzed it in my September 23 and October 9 e-mails. (As I concluded about the stock: "I'm going to put the stock on my 'bench' and hope a better buying opportunity comes along at some point in the future.")
But there was also strong interest in Expedia and Estée Lauder, so I said I would also take a look at both and see if either one looked compelling.
As such, I'll start with my "first look" analysis of Expedia today...
Expedia was in the news last week after the Financial Times reported that Uber Technologies (UBER) has explored a bid for the company:
Uber Technologies has explored a possible offer for $20 billion US online travel booking firm Expedia as the ride-hailing giant looks for new sources of growth, according to the Financial Times.
Citing people familiar with the situation, the FT said Uber has approached its advisers in recent months about making a bid for Expedia. The move was spurred by a third party who broached the idea of examining if such a deal would be possible and how it could be structured, the paper added.
Interestingly, Uber's CEO used to run Expedia. As the FT continued:
A key focal point of the discussions was Uber CEO Dara Khosrowshahi, the FT reported. Prior to joining Uber, he helmed Expedia from 2005 to 2017 and remains a non-executive board member of the group, meaning that an approach would likely be friendly and that he could recuse himself from conversations around a potential deal, the FT said.
While Expedia's stock is up around 6% since the news broke, analysts have questioned whether the deal makes sense for Uber. Here's more from the FT:
In a note to clients, analysts at Truist said they are skeptical "as to viability of such a transaction for Uber", arguing that it would not be in line with the company's stated goal of using mergers to drive growth.
"Expedia's current and projected growth rate is materially below that of Uber's," the analysts flagged.
Meanwhile, analysts at Bernstein said the report "surprised" them because they had anticipated that Uber would expand its operations into travel via partnerships "and not outright M&A".
"With a $20 billion market cap, an acquisition of Expedia would be the largest deal for the company, which has historically done smaller deals for adjacent delivery assets and/or found ways to simplify its footprint globally by exiting or consolidating international mobility and delivery markets," the Bernstein analysts wrote.
So I'm going to assume that Expedia remains a standalone company and do my usual first-cut analysis.
As you can see from the chart below, the stock had a fantastic run for nearly a decade from early 2009 through mid-2017... But today, after a huge crash at the beginning of the pandemic and an even bigger rally over the subsequent two years, it's now around levels first reached nine years ago:
As you would expect, Expedia's stock has followed the company's earnings.
In the chart below, you can see a big crash in 2008, a huge recovery, another crash in 2020, and a big recovery. But overall, both the stock and the company's profits have been essentially flat since 2015:
Turning to the cash-flow statement, we can see that, with the exception of the pandemic year in 2020, the company has consistently generated substantial and growing free cash flow ("FCF") – with a big spike in 2021 and then a fade back to the long-term trend line.
Take a look at the below chart of operating cash flow, capital expenditures ("capex"), and FCF:
As you can see in the next chart, Expedia has allocated its cash flow in three primary ways – a small dividend from 2010 to 2021, occasional acquisitions (with two big ones, of Orbitz and HomeAway in 2015), and highly variable share repurchases (which have increased sharply in the past two years):
Let's take a closer look at share repurchases by quarter, since this has been the primary area in which Expedia has allocated its FCF in the past two years – you can see the big increase starting in mid-2022:
As a result of this, Expedia's share count has declined by a hefty 14.8% in the past two years. Take a look:
Turning to the balance sheet, Expedia's looks very healthy. After taking on a modest amount of debt to pay for the two acquisitions in 2015 and then quite a bit more to survive the pandemic in 2020, the company has rapidly paid it off since then to a tiny level today:
Lastly, there's valuation...
As of Friday's close, Expedia has a nearly $21 billion market cap and $21.1 billion enterprise value ("EV"). The stock is trading at 1.6 times EV to revenues, 28.2 times trailing earnings per share, 13.5 times this year's estimates of $11.83 per share, and only 11.1 times next year's estimates of $14.37 per share.
Here's a chart of Expedia's ratio of EV to trailing revenues since the company went public in 2005, which shows that the multiple of 1.6 times is well below the long-term average of 2.4 times:
Looking at the forward price-to-earnings multiple, Expedia today is at 12.5 times (using Capital IQ's numbers) – that's also well below the long-term average of 19.7 times:
In summary, I like what I see in the financials.
Expedia is a capital-light business that generates a lot of FCF, which the company is now using to buy back its stock at a rapid clip. But its earnings – and stock price – have basically been flat for a decade... which is a linkage that I expect will continue (as is true for most stocks).
So to see if Expedia's stock looks compelling enough to buy, I need to do a deeper dive to see if I think the company's earnings can grow... so stay tuned!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.