Stock of the Week

Expedia Group

May 26th 2020

Expedia Group
Nasdaq Symbol (EXPE)
Industry: Online Travel
Price as of 5/22: $77.95

 

After a 35% correction, the major averages have rebounded 30% in short order. However, there is a large divergence in the returns of the major averages and sectors. Tech and healthcare have shined with the tech sector in the green for the year lifting the Nasdaq into the green for the year as well. The S&P 500 remains in the red, but down less than 10%. The Dow Jones Industrial Average is still lower by 13% for the year weighed down in large part to Boeing. With tech and maybe healthcare sectors ahead of themselves there are plenty of stocks and sectors still under pressure particularly in the travel and leisure industry. Many stocks like Boeing, the airlines and cruise lines are tough investments right now due to the fact they are bleeding millions if not billions in cash each quarter with growing debt levels. This week we will highlight an online travel company without the high cost structure of the companies they work with. The stock of the week is Expedia Group.

Expedia reported lackluster earnings this past week. The company lost $258 million with its first revenue decline in eight years. Revenue plunged 15.7% while gross bookings were down 39% in the first quarter.The second quarter will be even worse as one analyst called the travel trends as "horrific" with bookings expected to drop 78% in the current quarter.

While business is bad, and will not improve in the short run, the good news is Expedia is not bleeding a lot of cash and has secured $3.95 billion in additional funding, including $1.2 billion in preferred equity from private equity firms Silver Lake and Apollo Global and $2.75 billion in 5-year unsecured senior notes. The company also suspended their dividend payments and share repurchase plan. During the earnings report, the newly appointed CEO Peter Kern said management was ahead of Covid-19 with costs cuts and the consolidation of their marketing teams into a single unit for all their brands which include Trivago, Vrbo, Hotels.com, Orbitz and Expedia. The consolidation for one thing will help Expedia avoid having sister brands compete against one another in Google advertising auctions.

After the recent financing and costs cuts, Expedia is no longer concerned about liquidity. Management believes Expedia is well positioned for margin expansion once COVID-19 is contained and travel volumes start to rebound. The company is conservatively modeling a full recovery in 2023 while hoping the recovery will come much sooner.

With the stock down over 40% from last years' highs, private equity and investors are warming up to company. The stock currently trades for a little more than one times reduced sales, 12 times 2019 earnings estimates and 4 times book value. The stock may remain range bound for a while, but longer term this travel and leisure stock has good capital appreciation potential without the cash burn concerns of other travel and leisure stocks.