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Is Expedia Going to Soar High or Come Crashing Down on Earnings?

By Daniel Jones – Feb 4, 2014 at 10:24AM

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Heading into earnings, investors are looking for a lot of improvement by the online travel site. Can Expedia meet these expectations and come to rival or will it go the way of Orbitz?

Is Expedia (EXPE -6.31%) about to take a flight of its own? On Thursday, Feb. 6, the online travel company is due to report fourth-quarter earnings for its 2013 fiscal year. Oftentimes with earnings, shares of the companies reporting them have a tendency to rise or fall drastically. Given this consideration, shareholders of Expedia stock are likely evaluating their holdings and deciding what to do before the big announcement. Heading into earnings, the picture for Expedia looks nice, but shareholders should remain cautiously optimistic.

Mr. Market demands tremendous growth out of Expedia, but is anything new?
For the quarter, analysts expect Expedia to report revenue of $1.14 billion. If this comes to fruition, it would signify a 17% jump in revenue compared to the $974.86 million the company reported in the same quarter a year earlier.

Looking at earnings per share, the situation looks even more demanding. If analysts are accurate in their assumptions, Expedia will report earnings of $0.86. This would represent a 37% gain compared to the $0.63 the company reported in the fourth quarter of 2012.

While these expectations for the company are high, they shouldn't surprise shareholders. Over the past few years, Expedia has grown its top-line results at an impressive clip. Between 2009 and 2012, for instance, revenue at the business grew a strong 36%, from $2.96 billion to $4.03 billion.

In its most recent annual report, management claimed that the rise in revenue in recent years is due to an increase in room nights stayed. This was, however, partially offset by a combination of lower revenue per room night and lower revenue per ticket.

Despite seeing attractive revenue growth, Expedia has experienced difficulties in converting its top line into profitability. Between 2009 and 2012, earnings per share at the company actually fell 3%, from $2.06 to $2. The primary driver behind this was a massive increase in the company's selling, general, and administrative expenses, which rose from 44.6% of sales to 54.2%.

How does Expedia stack up to its peers?
Over the past four years, Expedia's peers have seen mixed results. For starters, Orbitz Worldwide (NYSE: OWW) only saw its revenue rise by 6%, from $737.6 million to $778.8 million. In light of a large and growing market, Orbitz is a relatively small competitor and its revenue reflects the difficulties facing any player that doesn't have a large footprint in the market.

In this time frame, Orbitz has failed to generate any profit whatsoever, but its bottom line has improved modestly. Between 2009 and 2012, the company's loss per share narrowed by 29%, from $4.01 to $2.86. Although the business saw only a 9% rise in its SG&A expenses, its profitability has been affected by a series of impairment charges. (BKNG -4.24%) is another story entirely. Over the past four years, it, like Expedia, has grown top-line results, but it has also seen a meaningful improvement in its earnings per share. Between 2009 and 2012, revenue at Priceline grew 125%, from $2.34 billion to $5.26 billion. According to the company's most recent annual report, the primary driver behind this jump in revenue was a significant rise in Agency revenue (i.e., third-party offers sold through the company's websites).

This rise in revenue, combined with the company's cost of revenue declining from 46.1% of sales to 22.4%, has allowed its earnings to skyrocket. Although the business saw its SG&A expenses rise from 31.3% of sales to 40.8%, its earnings per share managed to rise by 180%, from $9.88 to $27.66.

Foolish takeaway
Historically speaking, Expedia has done a good job of growing its revenue but has faced challenges in improving its profitability. This is likely attributable, in part, to the severe competition the business has had to contend with because of Priceline.

In its upcoming earnings release, shareholders will likely learn a lot about the company's future. In the event that management reports a rise in both revenue and earnings per share, it might signal that Expedia is finally digging itself out of its rut and could, moving forward, pose a more serious challenge to Priceline. On the other hand, a failure to live up to expectations could suggest that the status quo is destined to remain unchanged. If the latter turns out to be true, it could challenge the idea of Expedia being a viable long-term prospect for investors.

Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends The Motley Fool owns shares of We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Expedia Group Stock Quote
Expedia Group
$90.79 (-6.31%) $-6.12
Booking Stock Quote
$1,955.56 (-4.24%) $-86.63

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