The Real Reason This Rule Breaker Will Crush the Market

For months I've felt like a lone wolf howling in the desert about the merits of vacation rentals specialist HomeAway (NASDAQ: AWAY  ) . No longer. Wall Street joined the chorus earlier today after the company reported a strong fourth quarter and solid guidance  for the year ahead. The stock is up 9% as I write this morning, and was up more than 13% in early trading.

HomeAway beat estimates on both the top and bottom line. Revenue grew 22.4% to $71.6 million while adjusted earnings doubled to $0.14 a share. Analysts were expecting $70.9 million and $0.13 a share, respectively.

Guidance also came in above projections. HomeAway expects $78 million to $79 million in first-quarter revenue, and $339 million to $343 million for the full year. Wall Street was looking for $77.5 million and $337.3 million, respectively. Only a week ago, peer TripAdvisor saw its shares sink over fears that higher revenue wouldn't be able to overcome increased marketing costs.

I'm not so sure that's fair, but I'm also sure the Street is overlooking the best part of the HomeAway stock story. Like a well-preserved old manor with an abundance of easily missed nooks, you'll find it hidden away on the cash flow statement:

Metric

2012

2011

2010

Revenue (millions)

$280.4

$230.2

$167.9

Free cash flow* (millions)

$60.8

$58.6

$54.4

FCF margin

21.7%

25.5%

32.4%

Net income (millions)

 $15.0

 $6.2

 $16.9

Net margin

5.3%

2.7%

10.1%

DIFFERENCE

16.4

22.8

22.3

Source: S&P Capital IQ. *Unlevered cash flow, as tracked by Capital IQ

See the pattern? HomeAway consistently produces at three to four times more cash flow than profit, thanks in part to heavy investments to increase its worldwide database of property listings. At some point those expenditures will moderate and net income margin will widen to where FCF margin is today.

But that's also just my take, and you may have a different view. Please share your thoughts in the comments box below. And remember: If you're in the market for more stock ideas, The Motley Fool's chief investment officer recently named his top pick for the year ahead. Find out what he's eyeing in our brand-new free report: "The Motley Fool's Top Stock for 2013." Immediate access is just a click away, so act now.


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