After Rocking Earnings Is Expedia Overvalued?

Expedia (NASDAQ: EXPE  ) soared more than 13% on Friday, Feb. 7, 2014 after announcing operating results for the fourth quarter of its 2013 fiscal year. After seeing shares hit a fresh 52-week high that brought them to a hefty 44 times 2013's earnings, is the company overvalued or is there still some room to run before investors risk pushing Expedia too high?

Expedia smashed earnings and slightly outperformed revenue estimates
For the quarter, Expedia reported revenue of $1.15 billion. This represented an 18% year-over-year gain from $974.9 million and it was slightly higher than the $1.14 billion that analysts anticipated. According to the company's earnings release, the jump in sales primarily stemmed from a 25% rise in room nights provided to customers. This, in turn, was driven by a 21% year-over-year increase in gross bookings to $9.1 billion from $7.5 billion.

Looking at profitability, Expedia's situation was even better. For the quarter, management reported that earnings per share rose from $0.05 to $0.70. The rise in earnings was due in part to the company's cost of revenue falling from 23.1% of sales to 21.6%, but it was mostly driven by lower legal bookings. During the quarter, Expedia booked legal reserves and occupancy taxes of only $3.2 million, significantly lower than the $111.6 million it booked in the fourth quarter of 2012.

After adjusting for expenses that management believes do not demonstrate the earnings power of the business, Expedia's earnings per share came in at $0.92. This trounced the $0.86 that analysts expected and it was 46% higher than the $0.63 that the company earned in 2012.

Expedia smashes Orbitz but falls short of Priceline.com
Over the past four years Expedia has been a strong engine for growth, outperforming rival Orbitz Worldwide (NYSE: OWW  ) , but falling short of Priceline.com (NASDAQ: PCLN  ) . Between 2009 and 2012, Expedia's revenue grew by an impressive 36% from $2.96 billion to $4.03 billion.

Expedia's extraordinary growth was driven by a rise in the number of room nights sold by the online travel site, but it was negatively affected by a decline in revenue per room night. Throughout 2013 this trend continued, as demonstrated by the company's rise in gross bookings, but revenue margin declined from 13% of bookings to 12.7%.

Over the same timeframe, Orbitz fell short of Expedia's growth. Between 2009 and 2012, the company's revenue rose by 6% from $737.6 million to $778.8 million. Just as with Expedia, Orbitz experienced a decline in its revenue margin (from 7.4% to 6.9%), while benefiting from a rise in its gross bookings.

Priceline.com, however, has continued to impress shareholders. Over the four-year period, the company's revenue has jumped 125% from $2.3 billion to $5.3 billion. Although the company has been hit by a decline in its revenue margin from 25.1% of gross bookings to 18.5%, this margin still remains higher than those of Expedia and Orbitz.

The company has also been able to grow its gross bookings significantly over time. Between 2009 and 2012, the company's gross bookings grew 206% from $9.3 billion to $28.5 billion. This growth rate is far greater than the 13% rise in gross bookings reported by Orbitz or the 56% reported by Expedia.

Foolish takeaway
Based on the data, it appears as though Expedia's performance recently has been reasonable, but the company can't quite measure up to Priceline.com. Furthermore, with Expedia trading at a premium to Priceline.com's 2012 P/E ratio of 43, it's difficult to justify investing in this company over its larger peer. On the other hand, the business has shown over the past year that it is capable of improving its fundamentals to some extent.

For the full year, Expedia's revenue margin came out to 12.1%, slightly higher than the 11.9% it earned in 2012. Currently, this falls short of Priceline.com's revenue margin but it's a step in the right direction. In the event that the company can grow its profitability over time to match its rival, an investment in it may prove profitable. So, for the Foolish investor who believes that Expedia is capable of improving its operations, an investment in its shares may pay off in the long run. However, given the dominance of Priceline.com and its superior margins, I would feel more comfortable owning it instead.

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