EXPE - Expedia Group: A $5 Billion Buyback Suggests That Michael Burry Could Be Right Again

2023-11-03 01:03:45 ET

Summary

• Expedia Group's stock rose nearly 10% after announcing a new $5 billion share repurchase program.
• The company beat earnings and revenue expectations for Q3, driven by increased post-pandemic travel demand.
• Expedia's strong balance sheet and growth prospects make it an attractive investment, despite potential risks from competition and economic downturns.

Expedia Group, Inc. (EXPE) popped nearly +10% after hours on Thursday after the company announced solid earnings for Q3 including a new $5 Billion share repurchase program. That's pretty eye popping given that the company is currently sporting a $13.6 Billion market cap. Luckily, we were already invested in the stock thanks to a hint that we took from Michael Burry and his fund Scion Asset Management.

After their latest Q2 13F filing , we took notice that Mr. Burry's largest single stock holding was EXPE. This was a new position for his fund, as we learned in August. It prompted us to do our own due diligence and start a long position in the company.

The company earns solid ratings from Seeking Alpha with valuation, growth, and profitability all strong; a combination that is often hard to find and we look for in a GARP pick. Weak revisions are holding it back and we will discuss that more later.

We believe that Expedia has enough competitive moat and a decent game plan to become more efficient and deliver on growth expectations for as long as its customers can afford the discretionary spending. At a price to adjusted operating earnings multiple of 11x and our estimated PEG ratio of 0.7x we think there is a promising long opportunity in EXPE especially with the announcement of this new share repurchase program.

Quarterly Earnings Deliver With Beats

Company Q3 quarterly earnings beat on EPS and revenue. Non-GAAP earnings for the quarter came in at $5.41 per share for a beat of $0.41 while revenue of $3.93B beat by $0.07B. The company set a record for quarterly revenue growth of 9% and adjusted net income of $778 million, aided by the surge in post-pandemic travel demand.

Gross bookings have increased 7% YoY while booked room nights have increased 9% YoY. Quarterly adjusted net income of $778 million was 21% higher YoY. Margins have improved significantly over the past few years and restored to pre-pandemic levels. Management reiterated their 2023 guidance for margin expansion and revenue growth. In July, the company launched its new loyalty program One Key which is showing positive results so far.

Massive Share Buybacks Adding A Margin Of Safety

The company has already repurchased about $1.8B in shares in 2023 for an average price of around $100. Diluted shares outstanding has already declined by 8.7% from a year ago. The current market cap for EXPE is only $13.58B (before the after hours pop) which means that if exercised the new buyback program would retire ~34% of shares outstanding at current prices.

We expect that this share repurchase program may deploy over the next 2 years given the current pace of repurchases, expected free cash flow, and the balance sheet. EXPE has been earning $2.7B in FCF or more over the past 2 years.

The balance sheet can support the share buybacks. The company has reduced its total debt from $8.89B in 2021 to $6.55B in 2022 with a current balance of long term debt of $6.25B. This compares to $5.05B the company has in cash. Analysts are expecting approximately $2.47B in free cash flow in 2023. We believe this capital allocation provides significant margin of safety if growth expectations fail to materialize as expected.

Growth At A Reasonable Price

Growth prospects for Expedia are intriguing to consider from a macro point of view. It is to be expected that following the pandemic related lock-downs there would be pent-up demand for leisure travel and a surge in profits for companies like Expedia. The lockdowns also explain the steep decline in earnings that the company experienced in 2020-2021. However, with the benefit of time we are beginning to see that long term changes in consumer behavior appear to be cemented. The pandemic resulted in several key changes to consumer behavior related to vacation and travel.

For one, it seems to have shifted consumer priorities. Consumers appear to have greater value for leisure experiences than they did prior to the pandemic. Perhaps this is a consequence of a "life is short" effect that impacted people en masse. It seems clear that people, and in particular younger people, have shifted their priorities for what they want in life. Secondly, the widespread adoption of remote work is freeing up consumers to not only "work from home" but also to "work from vacation." There is a strong consensus that remote work has become a new normal and is expected to continue to rise in use.

EXPE management announced that it completed the migration of VRBO to its tech stack. This development is expected to help drive growth to the VRBO platform by removing friction from the service. This in combination with other streamlining efforts are expected to increase company efficiency and take advantage of growth in travel demand. The U.S. Travel Association expects that Domestic Travel demand will restore in or after 2024 and International inbound travel demand will not restore until 2025. The Global Business Travel Association expects International Business Travel to grow by 32% by 2027. These forecasts demonstrate the potential for the industry in the years ahead.

EXPE earnings are expected to grow by a CAGR of 20%+ over the next five years. At market close on Thursday, shares were trading at an adjusted operating P/E ratio of 10.32x which is half of its 12-year normal P/E and growth is expected to be higher than the past.

Using an Adj. operating P/E ratio of 15x to determine fair value, shares could trade up to $205 by 2025 if growth estimates prove correct and market decides to expand the price multiple of this stock.

What Could Cancel This "Vacation" (Risks)

We consider EXPE to have a weak competitive moat. While the company benefits from network effects that are not easy to replicate including listing data that would be difficult to consolidate from scratch, many of its services can be offered from other companies with relatively low barrier to entry. Well-known companies including Google and Costco already offer many of these services and the potential exists for competition to take market share or pressure margins. We add a small measure of confidence that the company owns VRBO which has a much smaller market share than Airbnb but is superior regarding customer fees which has become a hot-button issue lately. While short term vacation rentals are under increasing stress from regulations that are limiting, taxing, or prohibiting their operation, we believe that EXPE is largely insulated from this regulation risk because it impacts demand negligibly.

Earnings estimates have been revising down lately but remain robust. Over the next five years, the lowest YoY earnings growth estimate is 15%. We calculate a PEG ratio of 0.72 using this conservative growth estimate which demonstrates that EXPE offers a good GARP opportunity.

We believe that downward revisions may continue in the near future as the economic conditions in the U.S. and globally begin to deteriorate. While recession has not yet arrived, we believe the macroeconomic conditions are present for recessionary forces. Leisure travel is very discretionary and we expect consumers will cut back on spending sharply if they experience disruptions to income. Thus far, it does not appear that rising costs associated with inflation has dampened travel demand. But losses of income which typically occur during recession would certainly have an impact.

We have pointed out before that recession tends to kick off after yield curves steepen from being inverted. We expect that to happen in the U.S. again and are keenly watching as yield curves have been steepening in 2023.

Non-farm job openings offer some buffer or protection as they continue to remain elevated and will likely help to stave off the effects of recession if only for a time. We will be watching job openings and other employment data carefully for signs of economic weakness.

During the recession of 2008, EXPE maintained revenues relatively well but suffered on the bottom line. We expect similar impacts to the bottom line during recession which will impact the company's ability to buy back shares.

Summary

Expedia Group has the potential to deliver solid growth at a reasonable price. Management is showing that they understand how to improve company efficiency and reward shareholders. Given the valuation, we believe that share buybacks are better than implementing a dividend.

We occasionally get an investment idea from observing movements in hedge fund portfolios that have solid track records. Despite the naysayers, Scion Asset Management has a solid track record and we are glad that Burry put EXPE on our radar. Long term macro trends are favoring the leisure travel industry and although short term economic distress may derail company performance we see the potential and the margin of safety that come from a fair valuation, stable balance sheet, and a sizeable repurchase program.

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