Expedia, Inc.

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Expedia, Inc.GICS Sector Consumer DiscretionaryIndustry Internet & Direct Marketing RetailCurrent Price 1293-Year Target Price 275Company Description Expedia, Inc is one of the largest online travel companies inthe world. Operating under an umbrella of brands, Expedia caters to all needs ofboth leisure and corporate travelers. Expedia spun off trivago in 2016.Investment RationaleExpedia will benefit from increased consumer spending on travel experiences.Consumer confidence is at historically high levels and many factors point to ahealthy economy for the foreseeable future. Per a report released by Deloitte thisyear, the travel industry is positioned to benefit from a healthy labor market,which has boosted disposable income. Disposable income in the latter part of 2016was up 3.4%.After the financial crisis of 2008, growth in consumer spending on foreign travel inthe U.S. declined significantly, much further than disposable personal incomegrowth. In 2011, consumer spending on foreign travel reached pre-crisis levels andhas grown notably faster than disposable income. We believe this trend willcontinue and that consumer confidence, coupled with increasing disposableincome, will drive travel spending in the foreseeable future.Synergies from integrated brands will act as a catalyst for growth whiledifferentiating Expedia from its competitors. Expedia added three companies toits portfolio of brands in 2015, which have not been fully integrated into thecompany’s operations. We believe the synergies and revenue impact from theacquired brands have yet to be realized. Expedia acquired Orbitz and Travelocity in2015 to further consolidate the online travel agency industry. Orbitz drove growthin Engencia, increasing revenue by 16%. Expedia also acquired HomeAway in 2015to addresses the market of alternative accommodations, a platform its primarycompetitor lacks. As these brands are integrated into Expedia’s core platforms,they will expand the company’s customer base, increase the number of bookablelistings, and drive growth across all segments.Expedia will continue to benefit from the secular shift towards digital travelbookings. Booking travel accommodations online is now commonplace and theportion of bookings done in this form will continue to increase.USF Student Managed Investment FundAnalyst: Marc Costello, Jeremy Davis, Zachary DeGregorioMarch 23, 2017Key StatisticsMarket CapP/EForward P/EBetaDividend & Yield52 Week Range19.66B76.2820.7.771.12 & 0.85%96.58 – 133.55RevenueQ2Q3Q4FY2016 1,904Q12,1962,5812,0938,7742015 1,3731,6631,9381,6996,6732014 1,2001,4951,7131,3565,7642013 1,0121,2051,4021,1524,7712012 816.51,0401,199974.94,0302011 822.21,0241,141787.13,774Earnings Per Share2016 14 (0.11)0.671.940.503.002013 0.381.001.500.443.32RisksMetasearch engines limit Expedia’slistings in search resultsSuppliers of travel accommodationsproducts and services, such as airlinetickets and hotel bookings, directly toconsumers pressures online travelagenciesFailure to integrate acquiredcompanies into existing platformscould cause inefficiencies in the shortterm

Expedia, Inc.Business SummaryCompany InformationCorporate Overview Expedia, through its subsidiaries and brands, operates as anonline travel agency in the United States and internationally. Expedia serves bothleisure and corporate travelers through its extensive portfolio of brands:Expedia.com, Hotels.com, Orbitz, Trivago, HomeAway, Egencia, Travelocity,Hotwire, Expedia Media Solutions, Wotif Group, Classic Vacations, CarRentals.com,Expedia Local Expert, and Expedia CruiseShipCenters. These brands give travelersaccess to over 350,000 properties, 1.2 million bookable online listings in over 200countries, 500 airlines, rental cars, cruises, and destination services and activities.Founded 1996Headquarters Bellevue, WAEmployees 20,075Reportable SegmentsCore OTA is Expedia’s core online travel brands. This segment can be broken intotwo platforms, Expedia.com and Hotels.com, both of which include a majority ofExpedia’s brands. Expedia.com is a full service online travel platform that’sprovides travelers access to airline tickets, lodging, car rentals, cruises, andactivities and tours though its website and mobile app. Travelers have the optionof purchasing these services as packages or on a standalone basis. This platformincludes the following brands: Orbitz's, CheapTickets, Travelocity, Wotif Group,Expedia Local Expert, and Hotwire.com. The second core OTA platform isHotels.com. Hotels.com is geared primarily towards lodging accommodations.With 89 localized sites in 39 languages worldwide, Hotels.com acts as Expedia firstpoint of contact into new markets.Egencia is Expedia’s full-service corporate and business traveler brand. Thissegment offers managed travel services to corporate travelers worldwide. Egenciaoperates in over 65 countries across North America, Europe, and Asia. Thisplatform operates on an account basis in which Egencia charges corporatetravelers account management fees and transaction fees.HomeAway is Expedia’s online marketplace for vacation rentals and its responseto the growing trend of alternative accommodations. This platform markets overone million listings in over 190 countries. It does so through the following brands:VRBO; Stayz, an Australian based vacation rental marketplace; Abritel, a Frenchbased vacation rental marketplace; OwnersDirect; Homelidays; andBedandBreakfast.com.trivago is a hotel metasearch engine that provides price comparisons for over 1.3million hotels in 190 countries. trivago operates over 55 localized websites and itsmobile application, which are all offered in 33 languages. This segment generatesadvertising revenue primarily from sending referrals to online travel companiesand travel service providers.USF Student Managed Investment FundAnalyst: Marc Costello, Jeremy Davis, Zachary DeGregorioLeadershipPresident & CEODara KhosrowshahiAge47CFO & EVP, OperationsMark D. Okerstrom, MBA44Secretary, Executive VPRobert J. Dzielak46CAO & ControllerLance A. Soliday, CPA44SVP Global MarketingCyrill Ranque47Investor RelationsAlan Pickerill50

Expedia, Inc.Competitive AnalysisExpedia competes with both established and emerging companies in the online travel market. The company’s maincompetitor is Priceline Group. Like Expedia, Priceline markets travel services through a variety of brands and subsidiaries.Expedia’s Hotels.com and Priceline’s Bookings.com compete directly for hotel bookings; Expedia.com and Priceline.comcompete for services such as hotel and lodging, airline, car rentals, and cruises; and trivago competes with KAYAK to findthe best deals on hotels. Although both companies offer similar services, Expedia has an advantage over Priceline withHomeAway and Expedia Local Expert, which allows customers to search for activities and experiences in a variety of citiesaround the world. Expedia also competes with companies like Google and Airbnb. Google provides both airline travelservices and hotel booking services though its search engine. Expedia offers the same flights and hotels at lower ormatched prices. Airbnb is an emerging competitor in the online travel market with its rental-by-owner business model.Airbnb offers alternative accommodations and experience packages to travelers in 190 countries. Expedia entered in 2015when it acquired HomeAway. Expedia also faces competition from traditional travel agencies and large hotel brands, whichpush for direct bookings. This is not a major concern for Expedia because traditional travel agencies are losing market shareto OTA’s and Expedia has substantially more properties offered than any given hotel chain.Sector OutlookYear-to-date, the consumer discretionary sector is outperforming the S&P 500, realizing a 6.0% rise in price versus 4.4% forthe S&P 500. Recently, the consumer discretionary space has experienced major disruption. The purchasing habits ofmillennials has shifted growth within the sector away from mall traffic and retail locations to mobile and online shopping.This disruption is further exacerbated by the increasing number of tech startups that can undercut the pricing ofcompetition while often operating without profit. For this reason, it is important for investors to seek out consumerdiscretionary companies with strong brands that are constantly seeking innovation. Without strong brands and innovation,consumer discretionary companies will find themselves treading water in an environment plagued by increasing pricetransparency and easier substitution that has resulted from the move to the e-commerce environment. Fortunately,Expedia’s well-known portfolio of brands aids in its ability to dominate in its market.A Note Regarding the trivago SpinoffIt is important to note that the trivago IPO is different than the previously completed TripAdvisor spin-off. Expedia did notactually relinquish any of its shares of trivago during the IPO process. However, this was not the only reason for the spinoff.When Expedia acquired trivago in 2012, both companies agreed to add put and call option rights to the sale. This meantthat trivago had the right to sell their remaining shares to Expedia at a reasonable price and Expedia had the right topurchase the remaining shares of trivago at a reasonable price if the decision was made before the option expiration date.The first expiration date for the contracts came in December 2015, but, because both companies agreed to consider thepossibility of an IPO the deadline was extended significantly. Lastly, like the TripAdvisor spinoff, Expedia’s CEO madestatements about the transaction’s potential to unlock unrealized value for both companies.USF Student Managed Investment FundAnalyst: Marc Costello, Jeremy Davis, Zachary DeGregorio

Expedia, Inc.Methodology & ValuationEBITDA CalculationTo calculate EBITDA, we evaluated its historical relationship to revenues (past five years). We recognized that EBITDA as apercentage of revenue has not deviated from a tight range. For this reason, we calculated EBITDA based on the averagepercentage of revenue that it has accounted for over the period.EBITDA (% of Revenue)ValuationRevenueEBITDA% of Revenue2012 2013 2014 2015 20164030 4771 5763 6672 8774803879 1025 1103 161619.92% 18.42% 17.78% 16.53% 18.42%Average18.21%To value Expedia, we created an EBITDA multiple model based on the historical relationship between the market and thecompany’s financial performance. We chose this technique because it is discussed in the company’s 10-k as an adequatemethod for assessing the fair value of the company.To properly assess the company, we compared its historical EBITDA multiple (past five years) with that of its primarycompetitor. We recognized the trend of an expanding EBITDA multiple due to high growth rates and high growthprospects for the company. Given the fact that its largest competitor, in an industry considered a duopoly, trades at muchhigher EBITDA multiples than Expedia, we believe that the company will continue to experience multiple expansions untilthe multiple reaches this level.ResultsDue to these assumptions and calculations, we believe the company has a current value of 155 a share, which implies inan undervaluation of approximately 20%.We derived a 3-year price target of 275 on the stock.PCLN Historical EBITDA MultipleEXPE Historical EBITDA MultipleEBITDASHROUTEBITDA/ShareAvg. PriceEBITDA Multiple2012 2013 2014 20152016803879 102511031616140140133134155 5.74 6.29 7.70 8.23 10.46 44 57 77 107 1127.71x 9.05x 9.98x* 13.02x 10.70x*Multiple is an outlier due to the sale of eLong. Effect considered in analysis.2012 2013 2014 2015 2016EBITDA1889 2498 3286 3561 3230SHROUT5152535250EBITDA/Share 36.81 47.66 61.97 69.02 64.52Avg. Price 630 878 1,198 1,220 1,346EBITDA Multiple 17.13x 18.42x 19.33x 17.67x 20.87xAverge Multiple 18.69xValuationEBITDASHROUTEBITDA/ShareApplied MultipleFair ValueUSF Student Managed Investment Fund2017 2018 2019 2020 20211836 2091 2360 2641 2902155155155155155 11.88 13.53 15.28 17.09 18.7813.08x 14.08x 15.08x 16.08x 17.08x 155 190 230 275 321Analyst: Marc Costello, Jeremy Davis, Zachary DeGregorio

Expedia, Inc.Methodology & ValuationSensitivity AnalysisThe accuracy of our price forecast is highly dependent on Expedia’s number of outstanding shares in the associated futureperiod and the expected price to EBITDA multiple. Because of this, we have created a sensitivity analysis to model theimpact of potential deviations from our projected EBITDA multiple and the number of outstanding 3.78x14.51x15.27x16.08x16.88x17.72x18.61x19.54x 289.24 304.46 320.48 337.35 355.11 372.86 391.50 411.08 431.63 274.77 289.24 304.46 320.48 337.35 354.22 371.93 390.53 410.05 261.04 274.77 289.24 304.46 320.48 336.51 353.33 371.00 389.55 247.98 261.04 274.77 289.24 304.46 319.68 335.67 352.45 370.07 235.58 247.98 261.04 274.77 289.24 303.70 318.88 334.83 351.57 223.81 235.58 247.98 261.04 274.77 288.51 302.94 318.09 333.99 213.15 224.37 236.18 248.61 261.69 274.77 288.51 302.94 318.09 203.00 213.68 224.93 236.77 249.23 261.69 274.77 288.51 302.94 193.33 203.51 214.22 225.49 237.36 249.23 261.69 274.77 288.51 184.13 193.82 204.02 214.75 226.06 237.36 249.23 261.69 274.77 175.36 184.59 194.30 204.53 215.29 226.06 237.36 249.23 261.69USF Student Managed Investment FundAnalyst: Marc Costello, Jeremy Davis, Zachary DeGregorio

Expedia, Inc.ProformasProforma Income 9,52014,500,28915,934,367Cost of 76,8668,349,253ProductGross Profit9,638,543 11,027,228 12,502,032 13,738,611OperationsSelling and ,8466,717,2287,592,1938,426,959Technology and 659,8941,857,2402,040,922General and ,115,2361,273,2471,427,105Amortization of 31,347,4061,622,5401,717,828Other income )(185,102)(185,102)(185,102)Pretax 1,437,4381,532,726Provision for income 8,272)(294,675)(314,209)Net 142,7631,218,517Operating IncomeOtherMinority 20,563Total Net 163,3261,239,0802018201920202021Key Balance Sheet Items2015AssetsCash and cash equivalentsRestricted cash and cash equivalentsShort-term investmentsAccounts receivableIncome taxes receivablePrepaid expenses and other current assetsProperty and equipment, netLong-term investments and other assetsDeferred income taxesIntangible assets, netGoodwillLiabilitiesAccounts payable, merchantAccounts payable, otherDeferred merchant bookingsDeferred revenueIncome taxes payableAccrued expenses and other current liabilitiesLong-term debtDeferred income taxesOther long-term liabilitiesUSF Student Managed Investment Fund201620171,676,299 1,796,811 1,956,811 2,090,486 2,230,742 2,370,998 082,406 1,343,247 1,604,088 1,864,929 2,125,770 2,386,611 1,064,259 1,394,904 1,725,549 2,056,194 2,386,839 2,717,484 2,793,954 2,446,652 2,446,652 2,446,652 2,446,652 2,446,652 2,446,6527,992,941 7,942,023 7,942,023 7,942,023 7,942,023 7,942,023 9,336484,970311,446Analyst: Marc Costello, Jeremy Davis, Zachary ,05749,7391,090,8263,159,336484,970305,474

Hotels.com. Hotels.com is geared primarily towards lodging accommodations. With 89 localized sites in 39 languages worldwide, Hotels.com acts as Expedia first point of contact into new markets. Egencia is Expedia’sfull-service corporate and business traveler brand. This segment offers managed travel servi