Name That Trade – $EXPE: Called for Traveling

by Enis July 8, 2014 2:04 pm • Commentary

EXPE is the red-headed stepchild of Priceline in the online travel market.  The company is only worth $10 billion, vs. PCLN at $64 billion.  That’s despite the fact that both PCLN and EXPE were around $3 billion market cap companies in mid-2007.  EXPE has done well with the secular shift to online travel, but PCLN has been the major winner in the arena.

Expedia is actually much more of a hotel bookings company than an air travel focused site, as 66% of its revenues involve hotel reservations, vs. 11% of revenues from airline tickets.  The hotel bookings market has become much more competitive over the past few years, as management itself admits in the latest quarterly report:

Intense competition also historically led to aggressive online marketing spend by the travel suppliers and intermediaries, and a meaningful reduction in our overall marketing efficiencies and operating margins. During 2013,, trivago and TripAdvisor launched offline advertising campaigns in the United States for the first time thus increasing the number of participants in the travel advertising space, increasing competition for share of voice. This activity has generally continued and in certain cases has expanded beyond the United States.

EXPE has actually been unable to grow earnings since 2010, though the stock has moved significantly higher since then nonetheless.  Sales have risen from $3.35 billion in 2010 to around $5 billion today.  However, the rise in the stock is reasonable on a valuation considering that EXPE’s very depressed P/E multiple back in 2010:  

[caption id="attachment_42591" align="alignnone" width="600"]12 month trailing P/E, Courtesy of Bloomberg 12 month trailing P/E in EXPE, Courtesy of Bloomberg[/caption]

Today, EXPE does not look nearly so cheap.  Its 30x P/E multiple is only attractive if EXPE can meet or beat analyst estimates of 15-20% EPS growth over the next 3 years.  That seems like a tall order given EXPE’s poor performance over the past 3 years (again, no EPS growth), especially since the overall market backdrop is much more competitive.  In fact, GOOG entered the mobile booking market in April, detailed in this Bloomberg article:

Google Inc. (GOOG) wants you to reserve a hotel room from your smartphone, and it’s spending money on the technology to make it happen.

The biggest Internet-search company is licensing hotel-booking software from Room 77 Inc., a startup backed by Expedia Inc. (EXPE), according to a letter sent today to Room 77 shareholders that was obtained by Bloomberg News. Room 77 co-founder and Chief Technology Officer Calvin Yang and many of its engineers are joining Google, the letter said.

While EXPE backed Room 77, Google’s intentions are not likely altruistic.  The real target is Priceline, but in the process, EXPE could be falling behind in the mobile reservation space.  Management has targeted 20% of all transactions to be booked by a mobile phone by the end of this year.  Yet, Google’s entry into the market could make that tougher, especially if GOOG preferences its own booking offers ahead of EXPE, PCLN, and TRIP.  Here’s Bryan Murphy’s thoughts:

Just to make sure everyone is on the same page, Google announced earlier in the week that it is now a licensee of Room 77’s software. The company has developed and now licenses its tool for booking hotel reservations online. Most traders understand that much. What steadfast fans of Priceline and Expedia may not fully appreciate, is that the Room 77 utility is best-suited for travelers who want to find and book a room in a hurry, and may not have time to jump through the hoops that they may have to jump through via a site like Tripadvisor or through a site owned by Priceline Group. How do these hurried travelers choose to search and book? More often than not they don’t do it with a laptop or a desktop, but more often than not they do so through a smartphone or a tablet. That’s an area where Google can crush the competition, primarily because not only does Google now have a “play” in online travel, but it also owns the medium through which most users look for travel arrangements.

As mobile takes an increasing share of travel bookings, GOOG is likely to take market share away from the online travel companies if it makes a concerted effort in search results and advertising.

One positive for EXPE is its exposure to the Asian market, which has the best prospects for growth among the major regions.  About 47% of revenues were from outside the U.S. in the first quarter, with Asia the biggest growth drive going forward.

Yet, the elevated valuation and difficult market backdrop looks like a bad fundamental setup for EXPE. Finally, the chart looks bad after last week’s failed breakout:

[caption id="attachment_42590" align="alignnone" width="600"]EXPE daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg EXPE daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

EXPE reports earnings in late July and options are getting more expensive as we approach that event.  The stock is already down more than 4% this week.  However, we might be interested on a bearish trade in August or September on the next bounce in the name.

One that looks decent is the August 80/70/60 put fly which is around 2.50 currently but could make sense if it can be had for closer to $2 which would have a nice risk reward profile to target a down move. We’ll update here if we make a move.