Over the past decade, Priceline Group (BKNG 1.41%) and Expedia (EXPE 2.01%) consolidated the online travel market with a series of big acquisitions. Priceline absorbed rival travel sites like Booking.com, Agoda.com, and Kayak. Expedia expanded its ecosystem by acquiring Travelocity, Orbitz Worldwide, and holiday rental service HomeAway (AWAY.DL) earlier this year. Together, the two companies now control over 90% of the U.S. online travel market, making it nearly impossible for any rivals to gain ground.
Priceline is more dominant in Europe and Asia, while Expedia controls most of the U.S. market. Over the past 12 months, shares of Priceline have risen around 20%, but shares of Expedia have surged over 50%. Both stocks easily outperformed the NASDAQ's 9% gain, but which travel stock has more upside potential from current prices?
Image source: Pixabay.
Earnings growth comparison
Let's first take a look back at both companies' third quarters. At first glance, Priceline's third-quarter growth looks less impressive than Expedia's.
|
|
Revenue Growth (YOY) |
Bookings Growth (YOY) |
EBITDA Growth (YOY) |
|---|---|---|---|
|
Priceline |
9.2% |
6.9% |
12% |
|
Expedia |
13.5% |
14% |
13% |
Source: Company Q3 2015 earnings reports.
However, Priceline's growth was heavily weighed down by a strong dollar, since 88% of its bookings came from overseas markets. Excluding currency impacts, Priceline's bookings would have risen 22%. Less than half of Expedia's revenue comes from overseas markets, but the strong dollar still reduced its international revenue by 18 percentage points during the quarter. If the dollar weakens, Priceline's numbers should improve against Expedia's. But for now, Priceline's hotel room, airline ticket, and car rental bookings growth all remain weaker than Expedia's:
|
|
Room Nights Growth (YOY) |
Air Tickets Growth (YOY) |
Car Rental Days Growth (YOY) |
|---|---|---|---|
|
Priceline |
22% |
(1%) |
13% |
|
Expedia |
36% |
31% |
30% |
Source: Company Q3 2015 earnings reports.
Outlook comparison
Expedia exceeded top-line expectations but missed bottom-line estimates last quarter. It didn't provide clear guidance for the fourth quarter because of its acquisition of Orbitz, but it boosted its full-year adjusted EBITDA forecasts for the full year. Expedia expects its full-year adjusted EBITDA, including Orbitz but excluding the stake in eLong it sold earlier this year, to rise 12% annually. That's down from 18% growth in fiscal 2014 because of various acquisition-related costs.
Yet Expedia's earnings and guidance were still strong enough to cause the stock to rally on Oct. 29. Investors also reacted favorably to the announcement that it would buy Airbnb rival HomeAway on Nov. 4. But two days later, TripAdvisor missed third-quarter estimates and slashed its full-year revenue forecast. Those bleak numbers caused both Priceline and Expedia to sell off.
Both stocks continued to slide on Nov. 9 after Priceline's earnings report. Priceline beat top- and bottom-line estimates, but its guidance was weak. For the fourth quarter, Priceline expects bookings to rise between 1% to 8% annually, and for non-GAAP earnings per share to rise 2% to 10%. Analysts had expected 14% non-GAAP earnings growth. Priceline mainly blamed that miss on the strong dollar.
Valuations and dividends
Both stocks were taken down a notch, but Expedia remains fundamentally cheaper than Priceline at current prices. Expedia trades at 20 times trailing earnings, which is considerably cheaper than Priceline's trailing P/E of 28 and the average P/E of 24 for the lodging industry. Expedia's price-to-sales ratio of 3 is also cheaper than Priceline's P/S of 7 and comparable to the average industry ratio of 3.
In addition to having lower multiples, Expedia pays a small forward annual dividend yield of 0.8%. That definitely won't satisfy most income investors, but Priceline doesn't pay a dividend at all.
The winner: Expedia
As long as the U.S. dollar remains strong, Expedia will be a better online travel stock than Priceline. Priceline's growth should return when the U.S. dollar weakens, but that probably won't happen soon with rate hikes around the corner. Moreover, Expedia has cheaper valuations and pays a dividend.
In the near term, Expedia's divestment from eLong and its acquisitions of Orbitz and HomeAway will make year-over-year comparisons difficult. But over time, Orbitz will increase Expedia's exposure to the U.S. market and reduce the weight of its overseas business, while HomeAway will give it a firm foothold in the growing holiday rentals market.
