EXPEDIA INC EXPE
July 27, 2015 - 4:26pm EST by
obvious617
2015 2016
Price: 104.80 EPS 4.60 5.50
Shares Out. (in M): 128 P/E 22.5 19
Market Cap (in $M): 13,300 P/FCF 0 0
Net Debt (in $M): -300 EBIT 625 715
TEV ($): 13,000 TEV/EBIT 22 18

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  • Travel

Description

Expedia dramatically improved its technology and product over the last 5+ years and is poised to reap the benefits over the next 5 years. There has been a technology platform overhaul, a de-monetization effort, the consolidation of several competitors (one pending), and and investment in supply. All of these have been headwinds to reported financials and all should abate over the next several years. The company's decision to exit China removes another, large drag on reported financials. Finally, the company has an emerging asset in Trivago that does not currently contribute to profits but can be very valuable down the line.

  • Expedia has significantly upgraded its technology platform
    • The overhaul of the technology stack has been going on for at least five years now. It has been long and painful.
    • The company's many brands -- Expedia, Hotels.com, Venere, etc. -- are finally running on the same platform
    • This allows for faster product iteration, lower costs, and better control over marketing
    • Areas of noticeable improvement include search engine optimization (SEO) and search engine marketing (SEM). Expedia's rankings on each have been improving steadily
  • Reduction in monetization to drive competitiveness and supply
    • Expedia's original merchant model business had a commission rate in the low to mid 20% range
    • Booking.com's agency model had a starting commission rate that averaged somewhere closer to 15%
    • While Expedia has offered various rates over the years, its commissions were still, on average, higher than Booking.com's particularly in the key European markets
    • Expedia has been strategically reducing rates across the board over the last couple years in order to match the competition and reduce a key barrier to signing up new hotels
    • Analysts miss that this has been a large (~250bps) headwind that directly reduced revenues and EBITDA
    • Expedia is now at raw commission parity for all new hotel sign ups
    • Most hotels are on multi-year supply agreements so it takes some time to reset these. The company is probably more than half-way through this process now though
    • The result is that supply is growing rapidly, increased supply is resulting in higher room night growth, and the commission rate headwind will lessen going forward
    • Room nights sold grew 32% ex-Elong in 1Q15, up from 20% a year ago
  • Consolidation of competition with pending Orbitz transaction
    • Expedia has purchased several competitors in recent years including Travelocity and Wotif
    • The playbook is to reduce back office costs, move the acquired brands on the Expedia technology platform, and improve their conversion rates by adding the much large Expedia hotel supply base
      • If you visit Travelocity or Wotif today, you'll see they are pretty much re-skinned versions of Expedia.com
    • Expedia is now under agreement to acquire Orbitz for $1.6bn in cash
    • Orbitz stats
      • $12.4bn in 2014 gross bookings (1/4 of Expedia)
      • $932mm in 2014 revenues (16% of Expedia)
      • $139mm in 2014 EBITDA
      • $166mm in 2015E consensus EBITDA around time of the deal
    • Expedia has said they expect $75mm in synergies which would put the deal at 6.6x EV/EBITDA
    • Synergy target is too low
      • $75mm is only 8.8% of Orbitz's total 2014 total expense base
      • Non-advertising SG&A was ~$300mm in 2014
      • There are large overlaps in technology and back-office costs given the similarities in the business
    • Revenue synergies are substantial
      • Hotel revenues are 53% of total for Orbitz vs. 70% for Expedia -- this is the highest margin business
      • Orbitz's key weakness was a lack of quality hotel supply. It was overly reliant on GDS inventory at commoditized rates
      • Expedia will be able to offer its hotel supply on Orbitz which should improve conversion rates
    • Actual synergies could be 2x the company's estimate which would put the acquisition at 5x EV/EBITDA
  • Elong, the company's Chinese affiliate, has been divested. Removes a large drag on financials
    • Expedia sold it's interest in Elong to Ctrip for $671mm
    • Elong lost $33mm in EBITDA in 1Q15 and had been projected to lose a similar amount in future quarters
    • The deal reduces a major drag on profitability and exits Expedia from an irrationally competitive market
  • Trivago is a hidden asset with upside potential
    • Trivago is a hotel metasearch property that serves up hotel search results, extremely quickly, across hundreds of booking sources
    • Expedia acquired 62% of Trivago for 474mm euros in March 2013
    • Segment reporting now makes it more likely that Expedia will get credit for Trivago
    • LTM revenues were $449mm (including inter-company), +58% y/y
    • Trivago has been investing heavily in TV advertising in the US and Europe which has contributed to Expedia's overall de-leverage on Sales & Marketing
    • This has been money well spent as Trivago is now the dominant European hotel metasearch product. Many EU consumers start their hotel search on Trivago
    • Tripadvisor comparison
      • 1/3 of Tripadvisor revenues
      • 140mm hotel reviews across 700k hotels vs. 250mm hotel reviews on 1.7mm hotels at Tripadvisor
      • TRIP trades at 7.5x 2015 revenues
      • Trivago at 7.5x 2015 revenues = $4.3bn or 30% of Expedia's market cap
    • Trivago does not currently contribute significant EBITDA or EPS to Expedia because of the significant growth investments so it remains "hidden"
    • Expedia (and Barry Diller) have a history of realizing value in similar situations so it's appropriate to consider Trivago's potential independent value. Expedia owned Tripadvisor prior to spinning it out and both management and Diller have said they would do it again if it made sense
  • Aligned management: CEO compensation plan
    • CEO Dara Khosrowshahi received an updated equity package in March 2015
    • 1.6mm stock options vesting 50% on 3rd and 5th anniversary of grant date. $95 strike
    • 1.1mm stock options if Expedia trades at $170 for 6 or 12 months ended 9/30/20 (11% IRR from $95 strike price)
    • Vests in full on acquisition
  • Valuation reasonable
    • 2016 EBITDA bridge
      • Excluding Elong, 2014 Adj EBITDA was $1,050mm
      • +$158mm from 2015 core growth (high-end of guidance)
      • +$145mm from 2016 core growth, conservatively assuming deceleration
      • +$166mm from Orbitz
      • +$75-150mm from Orbitz synergies (run-rate)
      • =$1,594 - 1,669 2016 EBITDA (run-rate)
    • EV/2015 EBITDA = 11x
    • EV/2016 EBITDA = 7.7x
    • 2016 Unlevered FCF yield = 4.9%
    • 2016 Levered FCF = 9.0%
  • Shareholder returns
    • LTM dividends paid = $88mm
    • LTM share buyback = $441mm

EXPE has the potential to compound at a 20+% IRR for several years

 

Risks

  • Regulatory could deny Orbitz transaction
    • Expedia has received a 2nd request
    • Approval hinges on market definition. Does Expedia compete in the travel bookings market? The online travel bookings market? Does the market include corporate bookings?
    • While the deal is accretive and attractive, it's not necessary to the long case
  • Macro risks
    • A slowdown in Europe or the US could impact Expedia's growth rate in the short term
    • Tripadvisor highlighted a potential change in European travel patterns on its 2Q call
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Orbitz transaction
  • Improved room night growth due to better supply
  • Lower headwinds from reduced commission rates
  • Continued growth at Trivago
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    Description

    Expedia dramatically improved its technology and product over the last 5+ years and is poised to reap the benefits over the next 5 years. There has been a technology platform overhaul, a de-monetization effort, the consolidation of several competitors (one pending), and and investment in supply. All of these have been headwinds to reported financials and all should abate over the next several years. The company's decision to exit China removes another, large drag on reported financials. Finally, the company has an emerging asset in Trivago that does not currently contribute to profits but can be very valuable down the line.

    EXPE has the potential to compound at a 20+% IRR for several years

     

    Risks

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

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