Investing to Wealth

Expedia Inc. (EXPE) stock is surging in Thursday afternoon trading advancing 13%, as the online travel site reported earnings that eclipsed Wall Street estimates.  The company reported EPS ex-items of $.38 while the analysts expected just $.31.  Revenue was better than estimated coming in at $769 million for the quarter.  However, the company was not able to top last years sales results as they fell by 3.2%, and overall bookings slipped by 5%.  So, although sales have fallen somewhat from a year ago, consumers are making travel arrangements through Expedia more than the experts thought.  Like most other companies right now, Expedia touted aggressive cost cutting which dropped cost of service by about 13%. 

“To deliver 26% worldwide room night and continued OIBA growth in this environment speaks volumes about the abilities and execution of the global Expedia team,” said Dara Khosrowshahi, the company’s CEO and President. “Significant improvements in our customer value proposition, marketing efficiencies and improved cost control are just a few of the many accomplishments driving our businesses forward. There is much environmental uncertainty and a lot of hard work left to do, but we are well on our way.”

Expedia is the largest U.S. online travel agency, and the stock has taken a hit from the fact that the recession has strained most consumers ability to travel for pleasure.  The “staycation” has been a theme for many households as budgets are crimped.  Businesses effected by leisure travel are getting banged up right now (see airlines and hotels), and Expedia’s worldwide airfare revenue sank 20% in the quarter.  Domestic travel bookings held up better than international bookings by an order of 4% compared to 8% declines.

Given the current operating environment we are reiterating our Fairly Valued stance on EXPE shares.  We have been impressed by the resiliency of earnings results during this difficult period.  However, we think that investing in a business that relies so much on the leisure traveler is a dangerous proposition, with U.S. consumers increasing savings rates and unemployment rising.  Those consumers that are traveling are often driving to closer destinations rather than flying when possible, and this is a trend that we think is likely to continue.  The stock is trading (at the time of writing) at about 17.2x TTM earnings, and 18.3x expected full year 2009 earnings estimates.  That is not particularly cheap for a stock that has a fair amount of risk.  This stock is up 155% since the beginning of the year, which should give any value investor pause about investing after a huge ramp up.  Expedia is managing to perform reasonably well given the circumstance, but we are not recommending buying unless it drops into the mid to low teens.

Expedia Traveling Higher on Earnings