While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of Expedia (NASDAQ: EXPE ) sank about 7% today after Deutsche Bank downgraded the online travel company from buy to hold.
So what: Along with the downgrade, analyst Ross Sandler lowered his price target to $51 (from $66) -- pretty much where the stock closed on Friday -- suggesting that he sees limited upside at the current levels. The stock was crushed 27% after posting highly disappointing second-quarter results in July. Sandler expects the stock to remain pressured given the competitive headwinds, as well as cost issues that Expedia continues to face.
Now what: Deutsche believes that two of the three likely scenarios with Expedia this quarter don't exactly bode well for shareholders. These, according to the Deutsche Bank report, are:
- "The "Quick Fix," whereby Expedia fixes the short-term problems from the second quarter (TripAdvisor, Qunar, etc.) and is able to hit its full-year guidance,
- The "Almost Gets There," where Expedia fixes the second-quarter problems, but has additional cost for onboarding the Travelocity deal and other items and has to take guidance down slightly, or
- The "Breakdown," where Expedia sees further execution and competitive issues, and management reduces guidance again.
When you couple those unfavorable outcomes with Expedia 's still-lofty P/E of 40, it's tough to disagree with Deutsche's downgrade decision.
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