The travel agency industry is a quality investment route as it has proven to be recession resistant. During a recession consumers are even more desperate to find the bargains on travel so a travel agent is the perfect place to search for all accommodations for their trip. After performing a comparable company analysis and a deep dive into what sectors of the business generate the greatest margins I believe that Expedia (EXPE) is undervalued and can generate even greater returns by selling their Egencia segment.
Expedia also appeared to be very attractive when lined up with its comparable companies. I performed a brief comparable company analysis of a few of its relevant multiples in comparison to Booking Holdings (BKNG), TripAdvisor (TRIP), and Ctrip.com International (CTRP). Expedia has a smaller Enterprise Value (EV) than Ctrip.com yet boasts greater EBITDA. Expedia also has the lowest Price/FCF of the four companies at 13.35 as well as the lowest EV/EBITDA at 10.07. These lower than industry average multiples further prove that the company is undervalued from a Free Cash Flow perspective and generates earnings more efficiently than its competitors.
One of the largest growing competitors to travel agencies today is AirBnB as people are preferring to stay at residences as opposed to hotels. In 2015 Expedia acquired HomeAway as an adaptation to this trend and it has paid off significantly. HomeAway is a rapidly growing alternative accommodations company and it has helped Expedia diversify their system of services as they can now provide the local residence vacations that many travelers are looking for. As you can see from the excerpt of Expedia’s FY2018 10K below, the majority of revenue is still driven by the “Merchant” business model but the HomeAway business model has experienced the most rapid revenue growth with a 32% bump in 2017 and an increase of 29% in 2018. The merchant business model provides hotel bookings for customers and it is no surprise that this sector has experienced slower growth. I believe that HomeAway will become a more and more important source of revenue for Expedia over the next 2-3 years.
Expedia is broken up into four main sectors: Core Online Travel Agency, Trivago, HomeAway, and Egencia. The Core Online Travel Agency is the largest segment and it provides a variety of travel and advertising services through a portfolio of brands. Trivago represents the media and advertising expertise of Expedia. HomeAway is the second largest segment of Expedia and it provides alternative accommodations. Egencia provides the exact same services as the Core Online Travel Agency except it is more focused on the corporate traveler. I believe that Expedia can increase value moving forward by conducting a spin-off of their Egencia segment. Egencia is facing many competitors in the corporate travel agency space such as Trip Actions, Travel Perk, and Travel Store. This segment of Expedia has also produced the smallest revenue margins over the years hovering around just 7.5% while Core OTA and HomeAway are at around 10.5%. The sale of Egencia could decrease the costs of Expedia and increase their efficiency in generating revenue. It would also decrease the cost of Selling and Marketing which has been the greatest expense for Expedia in the last three years. Creating a relationship with an investment bank who can find a buyer for the Egencia segment would rid Expedia of their lowest revenue generator on margin and provide the company with cash that can be spent towards marketing their more valuable sectors such as the Core OTA and HomeAway.
Expedia could see lower growth moving forward due to the threat of AirBnB leading to a different preference in traveling but I believe that if Expedia can put more investment into marketing their HomeAway segment they can compete with the alternative accommodation companies. I believe that the best way to do this is by spinning off the inefficient Egencia segment and using the cash gained to better market the higher revenue generating departments at Expedia. When compared with its peers in an already recession resistant industry, Expedia is a great value and I believe that its current market price of $120 is well below the value that its future cash flows suggest.