This travel company missed Wall Street’s earnings estimates, but beat on revenue. The shares have recently fallen, but our contributor sees interesting potential for 2017.
Expedia (EXPE 123)
From: Ian Wyatt’s Million Dollar Portfolio
My outlook is for a stable U.S. economy in the coming year. Assuming that the U.S. does not enter a recession, business and personal travel will continue to grow in 2017.
That’s why I’m recommending shares of Expedia (EXPE). Expedia is an online travel company that was launched in 1996 as a division of Microsoft (MSFT).
The company’s websites help business and vacation travelers with all aspects of their travel bookings. This includes booking a flight, finding a hotel room, and renting a car. If you’ve made a trip in the last year, there is a very good chance you used Expedia or one of its many travel websites.
The company went public in an IPO in the late 1990s, before being acquired by Barry Diller’s InterActive Corp (IAC) in 2003. As part of InterActive, Diller rolled up several other travel websites including TripAdvisor, Hotels.com, Hotwire.com and a stake in Chinese travel site eLong. Diller then spun off the company, and it went public as Expedia.
Since then, Expedia has spun off TripAdvisor (TRIP) as a separate company. And it’s made acquisitions including Trivago, Orbitz and Travelocity. In late 2015, Expedia bought HomeAway in a $3.9 billion deal. HomeAway is a website that allows people to rent houses and apartments for business and vacation travel. Last quarter, HomeAway generated $210 million in revenues.
HomeAway’s popularity is often overshadowed by privately held Airbnb, which is valued at more than $20 billion. The HomeAway acquisition was a great deal, and gives Expedia a tremendous asset.
The latest third-quarter results were downright impressive. The company grew its revenues by 33% to $2.6 billion. Total bookings were $18.5 billion, a 21% increase. Recent acquisitions played a big role in that growth. Excluding the HomeAway and Orbitz deals, organic revenues grew 13%. With the U.S. economy growing at just –2% to 3%, this growth is impressive.
WSBI Editor’s Note: Fourth quarter earnings were $183 million, or $1.17 per share, lower than the $1.36 per share Wall Street expected. However, revenue rose 23%, $2.09 billion, higher than the $2.07 billion estimated. The company reported that both Orbitz and vacation rental platform HomeAway were beginning to pay off.
Since Donald Trump secured the White House in early November, the stock market has rallied. However, Expedia shares have been left behind. The stock closed Nov. 7 at $126 per share. Since then, it has lost nearly 5% of its value.
Looking forward to 2017, Expedia’s EPS are expected to jump 29%. Meanwhile, sales could rise 15%. Expedia EPS are expected to be $6.10 (before stock compensation expense).
As Expedia digests and integrates its recent acquisitions, the company’s profits will grow. The company has a good history of making strategic deals, combining them with current operations, and leveraging cost savings to boost the bottom line.
Looking out a couple more years, analysts think Expedia cash flow could grow to $12 per share in 2020.
At a price of $120, the stock commands a P/E multiple of 20 times 2017 earnings estimates. That valuation is a slight premium to the S&P 500, which is trading at around 18 times earnings.
But considering Expedia’s rapid growth, this valuation appears pretty reasonable.
2017 should be a strong year for the company, with a real possibility to meet or exceed growth estimates. On that basis, I’m recommending Expedia with a $153 share price target. That represents a P/E of 25 times 2017 EPS estimates of $6.10. The target represents a 28% increase from the recent share price of $120.
The travel business will continue to grow until the next recession strikes. Until then, Expedia should continue to thrive by helping people book flights, car rentals, hotel rooms and house rentals online.
Recommended Action: Buy Expedia below $125 per share.
Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio, www.wyattresearch.com, January 13, 2017