Expedia (NASDAQ: EXPE) is telling investors in the travel industry that things are doing just fine. When combined with solid reporting from the hotel industry, you should be invested in this sector. The growth is so robust that it cannot be ignored, and it tells us that the rise of online travel booking services is not going to change.
Room night growth grew 36% over last year, due to 25% and 50% increases in domestic and international, respectively. The Expedia earnings report showed gross bookings rose 20.9% to $15.4 billions, which generated $1.93 billion in revenue, itself a 15.9% increase. Adjusted EBITDA (an important number I’ll discuss later) increased 12.9% to $470 million, operating income grew 10.9% to $344 million, and net income rose 8% to $282.9 million.
Hotel Bookings Dominate
Expedia has consolidated a number of global travel players under its roof, now hosting 11 different brands, including Hotwire, Hotels.com, Orbitz and Trivago. As a result, Expedia has international revenue accounting for 46% of all revenue.
When you examine the revenue breakdown, you also see that people use Expedia primarily for hotel bookings, which account for 72% of revenue. Only 7% use it for airfare, meaning people are booking airlines on competitive websites and directly.
Average daily rate is an important metric for Expedia. The company generates revenue from commissions often based on the size of the booking. So if hotel rates are increasing, that’s good.
Domestically, ADR was up 4.6% in September. But, Expedia reported that its overall ADR fell 6%. I can attest to this, at least anecdotally. I just returned from Italy, Slovenia and Croatia, and I was staying in five-star hotels for $150 to $220 per night.
We also know why airlines are reporting such stellar earnings. Expedia air revenue was up 19% due to a 31% increase in air tickets sold (high demand).
Big Interest Payments
One issue that Expedia should address is its debt structure. I’m not concerned about the overall level of debt itself, at $2.5 billion. It’s just that the company has $750 million of 5.95% senior notes due 2020 and $500 million in 7.456% in senior notes due 2018.
There’s probably $30 million worth of interest payments that could be saved if Expedia refinanced into the mid-4% range. Meanwhile, the company has $2.5 billion in cash on hand, giving it all the resources it needs.
Meanwhile, Expedia presses ahead by adding all kinds of functionality for consumers. They’ve added an app for Galaxy phones, they’ve added a loyalty program, they’ve pumped so much marketing into Trivago that consumer awareness is not 50% as opposed to 5% just three years ago. Expedia also added another 14,000 hotels to its supply portfolio. I booked all my European hotels on the website, and was even able to book flights on Air Serbia (who knew?).
Is the stock a buy? It’s hard to say because valuation is difficult to ascertain. Expedia acquires some business, sold another, and also blew out its marketing budget this year. We can’t evaluate it on a price-to-earnings basis, but on an adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) basis.
Adjusted EBITDA for the trailing 12 months was $1.15 billion. Market cap is $19.48 billion based on after-hours trading. Thus, Expedia stock trades at an EBITDA multiple of 16.7.
The Priceline Group (NASDAQ: PCLN) is larger with a market cap of $72.9 billion, and trailing-12-month EBITDA of $3.48 billion, so it trades at an EBITDA multiple of 21.
Meanwhile, IAC/InterActiveCorp (NASDAQ: IACI) generated $485 million in trailing-12-month EBITDA, and trades at a multiple of 12.5. Although not a direct comparison since it isn’t a travel site, it is an e-commerce site, just for comparison’s sake.
Expedia stock trades at about a 20% discount to Priceline. Personally, I think Priceline has the better operation, but it may mean that there’s 20% upside to Expedia. That’s for you to decide.
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