Source: Expedia
Expedia (EXPE 9.02%) stock has been firing on all cylinders lately; shares of the online travel company are up by almost 60% over the last year. However, past performance is only prologue to future returns, so investors need to focus on the windshield as opposed to the rear-view mirror when analyzing investment decisions. Is now the right time to buy Expedia stock?
Traveling around the world
While Expedia is the leading online travel player in the U.S., rival Priceline (PCLN 3.17%) has more presence in international markets. Expedia produced $7.8 billion in domestic gross bookings during the second quarter of 2014, while international gross bookings were a smaller $5.2 billion. Priceline, on the other hand, generated 86% of its $13.5 billion in gross bookings from international markets during the second quarter.
This has allowed Priceline to outgrow Expedia over the last several years, however, Expedia is closing the gap by successfully expanding into global markets. International sales have risen from 43% of total revenues in the second quarter of 2012 to 45% in the same period during 2013 and 47% of total sales in the second quarter of 2014.
The international segment is producing higher growth rates than the domestic division. Global sales increased 30% during the last quarter versus a 19% increase for domestic sales, so growing participation of international revenues in the overall sales mix bodes well in terms of future growth for Expedia investors.
None of these means that Expedia is necessarily gaining market share versus Priceline globally. In fact, Priceline did better than Expedia with an annual increase of 36% in international sales during the second quarter. However, industry dynamics are clearly indicating that there is enough room for both Priceline and Expedia to benefit substantially from international growth in the online travel industry.
A promising future
CEO Dara Khosrowshahi highlighted during the latest earnings conference call the fact that Expedia still has abundant room for growth:
Travel spend, in general, is growing nicely faster than GDP. And then we've got the online tailwind behind us. And then we've been growing pretty aggressively internationally, as you know. So you kind of have 3 tailwinds behind you: you're in a good category, more is going online and mobile is accelerating. And for us, international remains a great opportunity that's very, very under-penetrated.
Importantly, the business model is quite profitable, and management is doing a sound job at keeping costs under control in order to translate growing revenues into earnings. Total sales during the second quarter of 2014 grew 24% to $1.49, while adjusted EBITDA increased at a faster rate of 35% during the quarter. Adjusted EBITDA margin grew to 17.3% of sales from 15.9% of sales in the second quarter of 2013. Free cash flow increased at an impressive 66% annually during the second quarter, from $247.8 million to $411 million.
Marketing spending has been rising through the last quarters as both Expedia and Priceline are actively venturing into new markets and different advertising channels. Marketing and advertising expenditures were $743.6 million in the second quarter, growing 26% versus the same quarter last year. Since marketing spending is growing faster than sales, this item is having a negative impact on profit margins.
Investors may want to keep an eye on marketing spending in order to make sure that things don't go too far in the spending war between Expedia and Priceline. However, as long management keeps the overall cost structure under control, there is a good chance that Expedia will continue delivering healthy profitability.
Attractive valuation
Expedia trades at a forward P/E ratio of 18.6 times earnings estimates for the coming year, a bit higher than the average forward P/E ratio for companies in the S&P 500 Index, in the area of 17.5 according to data from Morningstar. Considering Expedia's exciting potential for growth and solid profitability, this valuation premium does not seem excessive at all.
When comparing Expedia vs. Priceline, the two companies trade at similar valuations in terms of forward earnings. On the other hand, Expedia is considerably cheaper when looking at price to sales and price to free cash flows ratios.
| Company | Forward P/E | Price to Sales | Price to Free Cash Flows |
| Expedia | 18.6 | 2.2 | 11.3 |
| Priceline | 18.1 | 8.2 | 25.8 |
Data source: Morningstar
All in all, Expedia looks attractively valued when compared against both the general market and its main competitor Priceline.
Key takeaway
Expedia is delivering sound financial performance, and opportunities for growth look very exciting as the company benefits from growing demand for online travel services in the years ahead, especially in international markets. Considering that the stock is valued at very reasonable levels, it looks like it may be a good time to buy Expedia stock for the long term.
