2023-05-12 08:25:05 ET
Summary
- EXPE is trading at attractive valuation multiples, with trailing P/FCF around 5 and reasonable debt levels.
- Investors may be getting nervous as a recession is looming, which would severely impact consumer spending on travel.
- I believe current market prices offer an adequate margin of safety for long-term investors, even if free cash flow is impaired for a few years.
- Management has also been initiating buybacks at these suppressed prices in the MRQ, and have indicated they intend to continue to do so if price remains depressed.
Executive Thesis
There are many travel companies trading lower these days, and the market is probably right to be skittish. Every day we appear to be on the brink of a recession, and consumer spending on luxuries like travel would probably be one of the first things to get cut if and when the downturn officially hits. Expedia (EXPE) is not noticing any slowdown, with double-digit top and bottom-line FY 2023 growth guidance reaffirmed in the most recent earnings call .
On a multiple basis, this is one of the cheapest looking stocks I can find on the market. In the trailing 12 months, the company generated $2.8 billion in free cash flow, on an enterprise value of around $15 billion at time of writing. This puts EV/FCF at a little over 5 and P/FCF a little below. I believe this valuation provides an adequate margin of safety, which may give the investor confidence despite macroeconomic headwinds.
Company Overview
Expedia began as one of the first online travel agencies 25 years ago and has since expanded into becoming one of the largest travel search engines/aggregators in the world. Its largest segments are Expedia and Hotels.com, which focus on online travel bookings, and Vrbo which focuses on vacation rentals.
Debt Appears Manageable
In companies that trade at apparent discounts based on valuation multiples, debt can often be an issue detracting from equity holder's returns. This does not appear to be the case with EXPE. In the MRQ, the company had approximately $6.2 billion in long term debt, with negligible change y/y. Additionally, the company has a $2.5 billion revolving credit facility with $0 drawn down. As can be seen in the maturity schedule below, the company appears to be able to weather any short term headwinds with no significant maturities until 2025 and $5.9 billion in cash on the balance sheet.
Valuation
As management is guiding for a strong year with double digit top and bottom line growth, I began my model with FY 2023 FCF near that of 2022. I impaired 2024 free cash flow due to a likely macroeconomic slowdown, and assumed the company would take a few years to recover back to historic highs. I used 10% as a discount rate, which is above the cost of debt and is likely the minimum return stock investors would demand from the company. For terminal value, I assumed a 2% growth rate into perpetuity, as the company is cyclical and faces immense competition, so likely would not be able to grow more than the average long term inflation rate. I believe these assumptions can be considered conservative, and can be visualized below. This give us an estimated value of approximately $33 billion for the company.
This Writer
Risks
Cyclical Nature of the Business
It's likely that part of the reason the company trades at such a discount is the cyclical nature of the travel industry, with the reliance on a strong consumer. Any prolonged slowdown could materially affect our valuation assumptions, and could affect solvency of the company. That being said, the termed out debt schedule appears manageable and if cash becomes an issue the company may also be able to tap into their $2.5 billion revolver.
Competition
The online travel booking industry faces massive competition from large players like Google ( GOOG ) ( GOOGL ), and smaller players such as Airbnb ( ABNB ). As it is so competitive with minimal barriers to entry, margins could be eroded over time and more may need to be spent on advertising just to maintain market share.
Pandemic Risks
The company faced major losses and was slow to recover following the coronavirus pandemic in 2020. I assume the worst is behind us, but if a similar or worse disease spreads and governments again restricts travel for long periods, EXPE will likely swing cash flow negative, reducing shareholder value.
Guidance is Still Rosy
Although it is great that the company is doing good FY 2023 guidance, this may indicate that there is still further near term downside if there are any unexpected hiccups or if the economy does finally start showing signs of slowing. On the flipside, as the market appears to be offering discounts on travel companies, any long term signs of resilience may result in significant price appreciation. Additionally, management is being opportunistic about buybacks at depressed prices which may offset any near-term price weakness.
Conclusion
As Expedia appears to be trading at quite a large discount to cash flow generating potential, my knee jerk reaction was to assume there is something wrong with the company. On closer glance, the debt appears manageable and FY 2023 cash flow generation will likely remain high based on management's projections. It also offers confidence that management has been initiating share repurchases, and indicate they will continue to do so if the stock price remains undervalued. Of note, as of the MRQ, the company has 13.8 million more share repurchases authorized.
Even if we do experience a recession and modest setback with a slow recovery in cash flow to 2027, our models indicate a fair value of $33 billion, or over 100% upside at time of writing. The short term is of course uncertain as the company is still producing good guidance and any potential slowdown may not have been fully digested by the market. Despite this, the shares are trading at a large discount to cash flow generation with a P/FCF around 5. I believe current market prices offer an attractive entry point for long term investors, despite near-term uncertainty.
For further details see:
Expedia: Current Prices Offer Margin Of Safety Despite Recessionary Risks