Expedia Has Made Astute Acquisitions

In this article, let's take a look at Expedia Inc. (EXPE, Financial), a $10.89 billion market cap company tha is one of the world's largest online travel services companies. Businesses include Expedia, Hotels.com and Hotwire. In December 2011, Expedia spun off TripAdvisor as a publicly traded company.

Dominant player

Expedia is the world’s largest travel agent, providing travel products and services. With a market share of about 4%, we believe it will expand it as well as achieving double-digit revenue growth.

The internet and catalog retailing sub-industry includes more than 16,000 companies with combined annual revenue of over $160 billion. Expedia is positioned as a dominant online travel company in the U.S. When considering gross billings, it tripled its nearest competitor, Priceline.com. But this competitor is expected to grow at a faster pace due to its international operations in Europe and Asia. Considering these international operations, last year it grew 40% while Expedia growth was slightly more than a half of it.

Strategic acquisitions

The firm increased its economic stake in eLong, the second-largest Chinese online travel agent, contributing positive to earnings growth.

Other strategic acquisitions include Italy's Venere in 2008 and the joint venture with AirAsia in 2011. In 2013, it acquired 62% of European hotel search company trivago. Finally this year, it acquired Auto Escape and agreed to acquire Wotif, an online travel agency in Australia.

Revenues, margins and profitability

Looking at profitability, revenue grew by 22.15% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.94 vs $1.22).

The gross profit margin is considered very high at 83.04%, and it has increased from the same quarter the previous year. The net margin is at 7.68% and is ranked higher than 79% of the 1,005 companies in the Leisure industry.

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

The company has a current ROE of 21.14% which is higher than the industry median and the ones exhibit by Netflix Inc (NFLX, Financial), Groupon Inc (GRPN, Financial) and Amazon Inc. (AMZN, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Priceline Group (PCLN, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 26.9x, trading at a discount compared to an average of 30.6x for the industry. To use another metric, its price-to-book ratio of 5.77x indicates a premium versus the industry average of 2.34x while the price-to-sales ratio of 2.07x is above the industry average of 1.75x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $58,986, which represents a 42.6% compound annual growth rate (CAGR).

The stock has surged by 40.13% over the past year, outperforming the S&P 500 index.

Final comment

The company focuses on regions where online travel is gaining popularity. We strongly believe that the trivago acquisition should help to gain more exposure in the European market.

The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund guru Murray Stahl (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio), RS Investment Management (Trades, Portfolio) and Manning & Napier Advisors, Inc. added this stock to their portfolios in the third quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned