EXPE Stock Study (8-2-24)

Posted by Mark on September 24, 2024 at 06:42 | Last modified: August 3, 2024 11:23

I recently did a stock study on Expedia Group Inc. (EXPE) with a closing price of $121.48.

M* writes:

     > Expedia is the world’s second-largest online travel agency by
     > bookings, offering services for lodging (80% of total 2023
     > sales), air tickets (3%), rental cars, cruises, in-destination, and
     > other (11%), and advertising revenue (6%). Expedia operates
     > a number of branded travel booking sites, but its three core
     > online travel agency brands are Expedia, Hotels.com, and Vrbo.
     > It also has a metasearch brand, Trivago. Transaction fees for
     > online bookings account for the bulk of sales and profits.

Over the past 10 years, this large-size company has grown sales and EPS at annualized rates of 5.7% and -31.4%, respectively. Not gonna lie: it’s ugly at first glance.

M*, Value Line, and CFRA all agree that sales have been growing consistently with the exception of ’20 and ’21. Being a travel-related company, it makes sense to exclude those years from the full analysis due to COVID-19.

Value Line and CFRA [normalized earnings] suggest the YOY EPS spike (’15) and crash (-68.1% in ’16) reported by M* may not be as bad as they appear. Value Line reports the crash (-43.3% to the same 2016 M* number of $1.82) in ’16 but no spike in ’15. CFRA reports a dip in ’15 and strong growth in ’16 [mostly sustained rather than a transient spike]. I see enough reasonable doubt to believe the growth story and will exclude ’15 and ’16 from the full analysis.

As a result of the processing, over the last 10 years Expedia grows sales and EPS at annualized rates of 7.8% and 3.5%. Lines are mostly up and parallel with a sales/EPS decline in ’22. Five- and 10-year EPS R^2 are still a dismal 0.01 and 0.12 but to me, visual inspection for the six included years [especially since 2017] looks borderline acceptable.

Over the last decade, PTPM trails peer and industry averages while falling from 8.1% (’14) to 7.9% (’23) with a last-5-year mean (three data points) of 6.3%. ROE also trails peer and industry averages despite increasing from 20.2% (’14) to 43.5% (’23) with a last-5-year mean of 23.7%. Debt-to-Capital is lower than (even with) peer (industry) averages despite increasing from 49.5% (’14) to 81.1% (’23) with a last-5-year mean of 71.1%.

M* reports Quick Ratio of 0.61, Interest Coverage of 4.8, gives a “Standard” rating for Capital Allocation, and assigns a “Narrow” Economic Moat. Value Line gives a B++ grade for Financial Strength.

With regard to sales growth:

• YF projects YOY 7.4% and 7.8% for ’24 and ’25, respectively (based on 31 analysts).
• Zacks projects YOY 7.2% and 7.7% for ’24 and ’25, respectively (8 analysts).
• Value Line projects 7.0% annualized growth from ’23-’28.
• CFRA projects 7.9% YOY and 7.7% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year annualized ACE of 7.9%.

My 6.0% forecast is below the range.

With regard to EPS growth:

• MarketWatch projects 25.7% and 22.7% per year for ’23-’25 and ’23-’26, respectively (based on 34 analysts).
• Nasdaq.com projects 30.5% and 31.6% per year for ’24-’26 and ’24-’27 [7/5/1 analyst(s) for ’24/’26/’27].
• Seeking Alpha projects 4-year annualized growth of 20.1%.
• Argus projects 5-year annualized growth of 25.0%.
• YF projects YOY 20.5% and 27.2% for ’24 and ’25, respectively (26), along with 5-year annualized growth of 19.3%.
• Zacks projects YOY 22.0% and 26.0% for ’24 and ’25, respectively (8), and 5-year annualized growth of 28.7%.
• Value Line projects 21.0% annualized growth from ’23-’28.
• CFRA projects 22.7% YOY and 23.4% per year for ’24 and ’23-’25, respectively.
• M* projects long-term annualized growth of 25.8%.

My 18.0% forecast is below the long-term-estimate range (mean of six: 23.3%). Because M* ’23 EPS of $5.31/share is up 145% YOY and may be a transient spike, I am using trendline $3.96/share as the initial value.

My Forecast High P/E is 29.0. Over the past decade, high P/E ranges from 29.3 in ’23 to 66.5 in ’17 (excluding upside outlier of 100 in ’22) with a last-5-year mean (two values) of 33.8 and a last-5-year-mean average P/E (also excluding 76.2 low P/E in ’21) of 30.1. I am below the range.

My Forecast Low P/E is 21.0. Over the past decade, low P/E ranges from 16.3 in ’23 to 46.2 in ’17 with a last-5-year mean (three values) of 26.3. I am forecasting near bottom of the range (only ’23 is less).

My Low Stock Price Forecast (LSPF) of $83.20 is default based on initial value given above. This is 31.5% less than the previous close and 10.1% less than the 52-week low.

Over the past decade (excluding ’15 and ’16), Payout Ratio (PR) ranges from 22.1% in ’14 to 47.9% in ’17 before being eliminated in ’21. I forecast zero dividend [a course of action M* applauds].

These inputs land EXPE in the HOLD zone with a U/D ratio of 2.4. Total Annualized Return (TAR) is 12.9%.

PAR (using Forecast Average—not High—P/E) of 9.6% is decent for a large-size company. If a healthy margin of safety (MOS) anchors the study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 11 studies (my study and 5 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and PR are 7.7%, 17.8%, 28.8, 17.9, and 35.0%, respectively. I am higher on EPS growth rate and P/E range. Value Line’s projected average annual P/E of 20.0 is lower than MS (23.4) and mine (25.0).

MS high / low EPS are $12.25 / $5.34 versus my $8.11 / $3.96 (per share). My high EPS is less due to a lower initial value. Value Line’s high EPS of $13.80 is higher than both.

MS LSPF of $84.30 implies a Forecast Low P/E of 15.8: less than the above-stated 17.9. MS LSPF is 11.8% less than the default $5.34/share * 17.9 = $95.59 resulting in more conservative zoning. MS LSPF is 1.3% greater than mine, however.

With regard to valuation, PEG is 0.4 and 1.1 per Zacks and my projected P/E: quite low on average. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly low at 0.80.

MOS is robust because my inputs (especially low EPS) are below respective analyst/historical ranges. Except for EPS range, I am not particularly low compared to MS [all 11 studies projecting PR > 35.0% make me question these studies a bit] but a low sample size renders the comparison moot anyway. Anecdotally, MS TAR of 23.8% is 10.9% per year greater than mine.

The unanimous high EPS growth rate projections are what initially caught my eye. After reading the analyst reports, I’m still wondering why these are so high. Not only have earnings more than rebounded from COVID-19, caution abounds over a potential near-term slowdown in travel spending.

Nevertheless, EXPE is a BUY per U/D under $121/share. BI TAR criterion is met ~$117 given a forecast high price ~$235.

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