Is Expedia Likely to Outperform?

With shares of Expedia Inc. (NASDAQ:EXPE) trading at around $66.24, is EXPE an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Expedia reports earnings on Tuesday. If you’re looking for an earnings prediction, then you’re in the wrong place. This article will report the facts, and focus on the big picture. And instead of future earnings, we will look at past earnings, which have been fairly strong. Expedia has shown both EPS and revenue growth on a consistent basis. In addition to that, Expedia has grown through acquisitions. This isn’t a company that’s going to rest on its laurels. This is a company that’s always looking to improve, which is a great sign for investors.  

Expedia is now a full-scale international operation. Presently, at least 20 percent of its revenue is from overseas markets. That number will continue to increase. While Expedia is looking to spread its reach wide and far, the biggest news recently is strong growth in Asia. However, don’t get too excited. The margins and revenue in Asia are lower, and there will be increased competition from Chinese companies like Ctrip.com International Ltd. (NASDAQ:CTRP).

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Ctrip might be a threat, but Expedia has bigger problems to worry about in the competitive arena. The following competitors, and potential competitors, make Expedia look like a gladiator with a butter knife up against a well-armed, well-shielded, and well-trained army. These competitors and potential competitors include Priceline.com Incorporated (NASDAQ:PCLN), Google (NASDAQ:GOOG), Facebook (NASDAQ:FB) and Microsoft Corporation (NASDAQ:MSFT).

If this was an even playing field where every company started at the sound of the same gun, Expedia would be a huge underdog. However, that’s not the case. Expedia has a substantial head start. This hasn’t fazed Priceline, but the other companies listed will have a lot of catching up to do. Potential new players of this size can also be a big plus for Expedia as it makes them a potential acquisition target. Expedia might not have an interest in being acquired, and it’s highly unlikely that it would be acquired at this price, but it is a possibility down the road. By the way, Orbitz Worldwide (NYSE:OWW) is also a competitor, but it’s clearly not as much of a threat as the above-mentioned companies.

Let’s take a look at some important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Expedia is normal, and the balance sheet is strong. No worries here.   

Debt-To-Equity

Cash

Long-Term Debt

EXPE

0.51

$2.36 Billion

$1.25 Billion

PCLN

0.39

$4.67 Billion

$1.45 Billion

OWW

2.57

$152.29 Million

$440.42 Million

 

T = Technicals on the Stock Chart Are Strong 

Expedia has performed extremely well over the past three years. Expedia also currently yields 0.80 percent, which isn’t substantial, but it doesn’t hurt either.

1 Month

Year-To-Date

1 Year

3 Year

EXPE

2.75%

7.80%

97.08%

222.20%

PCLN

5.28%

10.04%

24.81%

241.30%

OWW

-2.22%

-11.08%

-19.64%

-50.65%

 

At $66.24, Expedia is currently trading above all its averages. 

50-Day SMA

61.89

100-Day SMA

59.12

200-Day SMA

52.91

 

E = Earnings and Revenue Have Been Steady          

Earnings and revenue have shown consistent growth on an annual basis since 2009.

2007

2008

2009

2010

2011

Revenue ($)in billions

2.67

2.94

2.74

3.03

3.45

Diluted EPS ($)

1.88

-17.60

2.05

2.93

3.41

 

When we look at the last quarter on a year-over-year basis, we see an increase in revenue, but a decrease in earnings.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.02

787.13M

816.49M

1.04

1.20

Diluted EPS ($)

1.50

0.53

-0.02

0.76

1.21

 

T = Trends Support the Industry

Despite a weak consumer, the industry is growing because Internet usage is increasing, which has led to more travel deal opportunities. It should also be noted that hotel trends remain steady in the United States and Europe, which is a small miracle.

Conclusion

Expedia has decent margins, strong cash flow, a healthy balance sheet, and consistent earnings and revenue growth. The current valuation isn’t great with a Trailing P/E of 27.16, but the concern shouldn’t be whether or not Expedia is overbought, but whether or not the broader market is overbought. Expedia is likely to continue to perform well in a strong market, but Expedia didn’t fare well during the financial crisis of 2008/2009. If a similar shock were to hit the markets, then Expedia would likely be hurt worse than most stocks. That said, if you’re a believer in Warren Buffet and his approaches to investing, then forget about the market trends and invest in profitable companies with strong growth potential. Expedia fits into that category.

As long as the broader market remains afloat, Expedia is an OUTPERFORM.

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