Tuesday, April 13, 2010

Expedia (NASDAQ:EXPE): Upgraded to Conviction Buy at Goldman Sachs

Goldman Sachs is upgrading Expedia (NASDAQ:EXPE) to a Conviction Buy from Neutral, raising their target to $31 (prev. $25). They are suggesting switching into EXPE from Priceline.com (NASDAQ:PCLN), which is getting downgraded to a Neutral from Buy.

Firm notes they raise EXPE, as: 1) They expect its hotel business to benefit from improving travel trends, given ADR leverage; 2) EXPE (at 15X 2010E EPS) has sharply underperformed PCLN (23X) and hotel stocks (30X) year to date; 3) While they forecast faster growth in online travel bookings in Europe than in the US, and thus faster growth at PCLN than EXPE, they believe this is now reflected in valuations: PCLN’s market cap was smaller than EXPE’s until early 2008, then similar to EXPE’s through mid-2009, and is now more than $5 bn (EV gap is around $4.5 bn adjusting for net cash), or 60%, larger than EXPE’s, suggesting that investors already discount a bigger, as well as faster-growing market in Europe. PCLN shares are up 305% vs. the S&P 500 down 21% since adding PCLN to the Buy list on June 28, 2007.

EXPE shares have underperformed the S&P 500 and PCLN by around 8% and 20% YTD on fears over net revenue rates, tougher comps, and potentially higher marketing spend. Goldman believes that EXPE shares substantially discount these concerns and can appreciate 23% driven by 1) multiple expansion, as investors gain confidence in EXPE’s longer-term volume growth potential; 2) positive estimate revisions, as occupancy rates improve, driving better ADRs; and 3) dividends and buybacks, given low leverage and more than $650 mn in FCF.

EXPE’s domestic operations generate more than 60% of gross bookings and revenue
Goldman focuses on the US for EXPE as roughly 60% of EXPE’s gross bookings and revenue come from the US, though the US proportion has been declining over time. Outside the US, they do not believe that investors are giving EXPE enough credit for potential growth and market share gains in Europe (where EXPE is still ramping up recently acquired Venere) and Asia (where EXPE controls second-place China OTA eLong).

PCLN’s 70% greater enterprise value already reflects the faster growth opportunity for European online travel bookings vs. US online travel bookings
Goldman estimates the total travel market size (offline and online) in Europe at $299 bn, roughly 27% bigger than the total travel market size in the US, due to a moderately larger GDP in Europe than in the US. Given higher online penetration of travel bookings at close to 60% in the US versus 34% in Europe, they believe that the US online travel market is currently one third larger than the Europe online travel market. Over the next several years, the firm expects the online penetration ratios and thus online travel market sizes of the US and Europe to converge, driving faster bookings growth for PCLN than EXPE. EXPE and PCLN possess similar penetration rates of online hotel bookings in their respective chief markets. However, because PCLN’s enterprise value is already 70% greater than EXPE’s, they believe that the faster European online travel growth opportunity is already discounted in valuations.

Notablecalls: Piper Jaffray upgraded EXPE yesterday morning but the stock didn't produce much of a move. With Goldman now giving their blessing on the name, I think we will see a nice 5%+ move.

I expect to see some sell interest in PCLN as well, as people switch from the outperformer to the relative underperformer.

1 comment:

DL said...

Really weak effort by EXPE stock. Opened on its highs and closed at its lows. Market also rallied and even PCLN closed at its high. Some of Goldman's calls as of late have been faded. Interesting. I would have thought after Piper yesterday and Goldman today, there would have been some interest in the stock.