Sunday, October 25, 2009

Flying High With Expedia

Expedia is scheduled to report 3Q09 results on Thursday October 29 prior to the market open. Consensus calls for revenues of $828 million and EPS of $0.43. My model is projecting revenues of $840 million and EPS of $0.47, four cents ahead of the Street. The shares are likely to rally after the print.

Traffic to the site in 3Q09 was robust, up in the double digits, and results should benefit from FX. In addition, search CPCs for travel terms have remained subdued, and that should help margins.

Expedia currently trades at 9.2x 2010 EBITDA vs. Priceline, which trades at 11.7x 2010 EBITDA. There is no clear reason why Expedia should trade at a lower multiple, and I would argue that Expedia, due to its market leading position, should trade at a higher multiple. If we assume that Expedia trades at Priceline’s multiple, then we would instantly argue for a 20% upside to the share price.

The shares should benefit from both higher estimates and multiple expansion, which should lead to a share price in the $40s from $26 today. The Internet peer group, the most appropriate group to compare Expedia to, is trading at a mean multiple of 15x 2010 EBITDA. Historically, the travel websites have traded at a discount to their Internet brethren due to cyclical concerns, pricing pressures, and other secular issues such as competition from the hotel and airline supplier sites. However, the latter has not materialized in a meaningful way so as to suppress the growth of the online travel sites. Overtime I expect the multiple gap to narrow.

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