Expedia Inc (NASDAQ:EXPE) popped 15% on October 26th after smoking analyst expectations for revenue and for earnings per share in the third quarter of the year. While earnings were down 18% from the third quarter of 2011, this was entirely due to Expedia’s spinout of Tripadvisor Inc (NASDAQ:TRIP) late last year as income from continuing operations was about flat. This did reflect lower margins, as revenue was up 17%, and was a slowdown from the first half of the year (in the first nine months, income from continuing operations was up 11%. As such, the business is not exactly thriving as it fails to keep cost growth down, but is also not doing badly given how much concern there has been over a weaker U.S. and global economy.
At a market cap of $8 billion, Expedia Inc is trading at 21 times what had been its trailing earnings; by our calculations, the trailing P/E is now 24. That’s not a pure value by any means, and with income from continuing operations not showing any improvement in this past quarter (though it has been up year to date) we’d be wary of investing. The forward P/E based on consensus estimates for next year is 17, as analysts expect considerable growth in earnings per share. With its gain today, Expedia has about doubled in price year to date. The company has generated $1.5 billion in cash flow from operations in the first nine month of 2012; a little less than half of this was used on investment activities such as acquisitions, capital expenditures and purchases of marketable securities with most of the rest going in Expedia’s cash account.
John Thaler’s JAT Capital Management initiated a position in Expedia Inc during the second quarter, closing June with 4.6 million shares in its portfolio. This made it one of the three largest positions by market value in the fund’s 13F portfolio (see more stock picks from JAT Capital Management). Renaissance Technologies, founded by billionaire Jim Simons, also liked the stock and nearly doubled its position between April and June; it reported a position of 1.2 million shares (find more stocks that Renaissance Technologies was buying). Read about how hedge funds are playing the travel industry.
Priceline.com Inc (NASDAQ:PCLN) is Expedia’s leading competitor and closest large cap public peer. It looks very similar to Expedia from a multiples perspective at 24 times trailing earnings and 16 times forward earnings estimates. Priceline, however, reported large increases in revenue and earnings in the second quarter of 2012 compared to the same period in 2011- notably, a 37% increase in net income. It is also a much larger company by market capitalization and with higher growth rates expected from Wall Street analysts we think that it is a better buy. Kayak Software Corp (NASDAQ:KYAK) is another peer; at a market cap of $1.3 billion it is very high priced at 32 times consensus earnings estimates for 2013. It has, however, been taking advantage of its smaller size to grow even more rapidly than Priceline. It experienced a 36% increase in revenue and a near doubling of earnings in the second quarter compared to the second quarter of last year. It’s probably still too expensive to pick over Priceline, but these growth rates are too high for us to recommend any kind of pair trade action
Tripadvisor, which focuses on reviews, is off just a bit from Expedia and Priceline. It carries trailing and forward P/E multiples of 23 and 17, respectively. Its earnings were about flat in the second quarter of the year versus a year earlier despite rising revenue, but it’s hard to make those comparisons as the company was an Expedia business unit in those days. Still, we doubt that it is as good a buy as Expedia or Priceline. We can also compare Expedia to Chinese travel tours company Ctrip.com International, Ltd. (NASDAQ:CTRP). Ctrip.com is down 46% in the last 52 weeks; in addition to general concerns about Chinese companies, it reported 40% lower earnings in the second quarter than in Q2 2011. At a trailing P/E of 20, and with its exposure to the Chinese economy, we’d avoid the stock.
Expedia looks similar to Priceline in terms of its valuation multiples, but that doesn’t make much sense to us. We see stronger historical growth at Priceline despite its larger size, and think that it should continue to offer better growth in the future at the same price.