2023-07-20 15:01:31 ET
Summary
- I have decided not to buy Expedia Group's stock due to its high price and despite it being cheaper than when I last reviewed it.
- The company's financial performance has not been very impressive, with a net income loss and a massive debt due in 2025, which the company may struggle to meet.
- I think investors be concerned about recency bias, which is the tendency to assume that the current state of the world will last, and suggest investors should constantly monitor their investments.
It's been about two and a half years since I wrote my bearish piece on Expedia Group Inc. (EXPE), and, right on time, over the next 13 months, the shares were up about 48%. They then crashed in price, and are now down about 16% against a gain of about 19.6% for the S&P 500. So I thought it would be worthwhile to write about the stock again, because a stock trading at $119 is a less risky proposition than the same stock when it was trading at $141. I'll decide whether to buy in or not based on the recent financial performance and the valuation. I also want to write briefly about the status quo bias, because it's always a good idea to remind investors about that problem, and this stock is as good an example of that than any.
Welcome to the "thesis statement" portion of the programming. It's here where I offer you the gist of my thinking up front. With your curiosity thus sated, you can choose to go and do something else, or you can read on, delving more deeply into my thought process. You're welcome. So, I won't be buying Expedia today for a few reasons. First, although it's cheaper than it was when I last reviewed it, it remains expensive. It's particularly expensive when you consider the massive obligation coming in 2025, and that there's a possibility that interest rates will remain elevated between now and then. Although there's some optimism among analysts, the company is still losing money, and so given that, we should apply a discount to it. This is especially the case when we have the alternative to buy government notes at fairly decent rates. Finally, I introduce readers to a bias called "recency bias", which is the tendency to assume that the current state of the world will last. Just because a stock has moved up in price, doesn't mean it will remain elevated. The world is in flux, and you should therefore monitor your investments constantly and carefully, no matter what the financial media or others might tell you.
Financial Snapshot
The latest financial performance has not been great in my estimation. First, in spite of an 18.5% uptick in revenue, net income moved from a loss of $122 million in the first quarter of last year, to $145 million this year. This was in spite of a 10% improvement in operating income, and a jump in interest income from $3 million in 2022 to $43 million in 2023, and a boost of "other" income from $5 million to $78 million.
In addition, the capital structure is a source of pain in my view. The company's $1.036 billion 6.25% notes come due in 2025, and the company has about $5.9 million in cash on hand at the moment. The company's current cash holdings represent only about 9% of the interest payment on this debt alone. So, it is likely that the company will need to return to the credit or equity markets to meet the shortfall in two years. Those who've been paying attention at home know that interest rates are relatively elevated at the moment, so 6.25% may be a distant, relatively pleasant memory by the time this debt comes due. Finally, the capital structure has deteriorated massively over the past several years, and I see no sign that this will slow. Over the past four years, shareholder equity has declined by about $2.34 billion, or 41.6% relative to the same period a year ago.
All that written, someone likes the stock, and we buy the future and not the past, so it might be worth considering at the right price.
The Stock
I'm not sanguine about this business, and I'm treating this enterprise like a turnaround situation. The reason for that is that in order to be investment worthy, the company will have to turnaround from its loss. For that reason, I'm going to insist on a pretty decent discount on these shares. If the shares are cheap enough, I'll buy. If they're not, I see little reason to invest, and will continue to eschew them.
If you read my stuff regularly, you know that I measure the cheapness of a stock in a few ways ranging from the simple to the more complex. On the simple side, I like to look at ratios of price to some measure of economic value, like earnings, free cash flow, and the like. I want to see the shares trading at a discount to both the overall market and to its own history. I previously eschewed the shares because they were trading at about 12.25 times book, and the market was paying 2.88 times sales for the stock. Fast forward to the present, and here's the state of the world:
The shares are between 20% and 45% cheaper than they were previously, but I'd suggest that they're still not objectively "cheap." They're certainly not cheap enough to compensate me for an investment in a company that's currently losing money, and that has a massive debt coming due in 2025. They're absolutely not cheap enough to compensate me for all of the above, when I can earn a very low risk 5.35 %. Given the above, and given the much more palatable alternatives open to me, I'll leave these shares to the hopeful analysts, and I'll clip my 5.35% risk-free.
A Quick Note on Recency Bias
Recency bias is the tendency to place greater importance on recent events, and this leads investors to assume that the current state of the world will linger. There were some hints of this bias in my most recent missive as some people lamented sarcastically that I eschewed the shares just before they spiked in price. The lesson for investors is that the world is in greater flux than we generally know. Because an investment has risen in price does not mean that it's going to continue to do so, or that the price won't fall back down again. This is a very important lesson to learn in my view. Those of us who constantly gauge our investments against a valuation benchmark are dismissed as being "traders." If I were a more paranoid man, I'd suggest that there was an entire financial services industry that was built up, and profits from the "buy and forget" attitude. I think the example of people who bought Expedia around $200 offers a powerful counterexample to the idea that you "buy great companies at sometimes less than great prices, and forget about them."
For further details see:
Expedia Remains Pricey