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Expedia, a stock for the long-haul
The top online travel firm is a public company again but Wall Street is wary. Time to hop on board?
September 1, 2005: 12:28 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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A bumpy flight: Shares of Expedia have taken a tumble since it was spun-off from IAC/InterActive in August.
A bumpy flight: Shares of Expedia have taken a tumble since it was spun-off from IAC/InterActive in August.
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Bargain fares...and stock
Though Expedia trades at a premium to its rivals, it is the market leader and is expected to grow faster than most rivals.
Company '06 P/E LT. Est. EPS Gr. Market share* 
Expedia 18.9 15% 45.3% 
Cendant (Orbitz and CheapTickets) 12.2 13% 24.9% 
Sabre Holdings (Travelocity) 11.8 10% 23.1% 
Priceline 14.8 18% 6.7% 
 * based on gross bookings for online travel agency sites as of 6/30/05
 Sources:  Thomson/Baseline, Citigroup

NEW YORK (CNN/Money) – Expedia is back.

Well, the popular online travel agent never went away really. But for investors, it kind of did.

The company, originally started by Microsoft (Research) in 1996, was spun off by Mister Softee in 1999 and on their first day of trading, shares surged 282 percent. (Ahh...the late 1990s. A 282 percent pop on the first day wasn't even enough to rank Expedia in the top 10 performing IPOs of 1999!)

Expedia's days as a standalone entity didn't last long though. USA Networks, the conglomerate run by media mogul Barry Diller, purchased a majority stake in 2002 and the remainder of the company in 2003.

But now, Diller, in an attempt to make Expedia a stronger pure play travel firm, has spun off Expedia from the rest of his media and online operations, which are now known as IAC/InterActive (Research). Expedia began trading as a separate company once again on August 9.

Odds are, if you've booked a trip online in the past few years, you've used Expedia (Research) or one of its sister companies, Hotels.com, Hotwire or TripAdvisor. Expedia is the clear online travel agency market share leader. So should you buy the stock?

So far, life as an independent firm has not been kind to Expedia. Although shares gained 6 percent in their first day of trading earlier this month, the stock has steadily lost altitude since then.

Tough competition in the U.S.

Wall Street is lukewarm about Expedia's prospects since the online travel business has become increasingly cutthroat over the past few years as the industry matures.

In a recent research note, Aaron Kessler, an analyst with Piper Jaffray, wrote that "the competitive environment remains intense, both among the online travel agencies as well as the suppliers."

In other words, Expedia doesn't just face challenges from the likes of fellow online travel companies Priceline (Research), Cendant's (Research) CheapTickets and Orbitz and Sabre Holdings' (Research) Travelocity but also from airlines and hotels as well, who would like to keep more and more of the revenue from online bookings for themselves instead of sharing them with a third party like Expedia.

Expedia generates sales both as an agent (i.e. it merely passes on booking info to a travel supplier and receives a commission) and also as a merchant (i.e. it pays suppliers for tickets, rooms, etc and it pockets the difference between what it charges consumers and what it pays the travel supplier)

And hotels, in particular, have become stingier about the number of rooms that they are willing to offer to Expedia, especially on a merchant basis. To that end, lodging firm InterContinental Hotels Group (Research), which owns the InterContinental, Holiday Inn and Crown Plaza brands, decided last year to stop listing rooms on Expedia and Hotels.com.

In addition, travel search engines such as FareChase (owned by Yahoo! (Research)), Kayak, Sidestep and Mobissimo are also emerging as competitors for online travel dollars.

Mark Mahaney, an analyst with Citigroup, wrote in a recent report that he's concerned about how green Expedia's new management team is. Expedia new chief executive officer Dara Khosrowshahi was the chief financial officer at IAC/InterActive. So he clearly has experience in the online travel business.

But Mahaney notes that Expedia's CFO Mark Gunning and executive vice president of technology Paul Onnen are both new to Expedia and the online travel industry. (Gunning had been an exec at AT&T Wireless and several other wireless firms while Onnen was most recently the chief technology officer of WebMD and before that, the CTO at Nordstrom.com.)

"Expedia faces some very challenging industry dynamics right now, and we will have to wait and see whether the new team is up to the task," Mahaney wrote.

And of course, Expedia faces risks that affect all travel-related companies, such as continued turmoil in the airline industry -- a possible Delta (Research) bankruptcy and labor problems at Northwest (Research), for example -- as well as unforeseen natural events. Hurricane Katrina will obviously cause a drop-off in leisure and business travel to New Orleans for the foreseeable future.

But stock looks like a bargain given int'l growth prospects

Still, all of this might already be more than factored into the stock. Both Kessler and Mahaney conceded that Expedia's valuation is reasonable given the concerns.

Shares trade at about 19 times pro-forma 2006 earnings estimates, which is a premium to Sabre Cendant, and Priceline.

But a premium is probably warranted given Expedia's market share lead. Plus, Expedia's earnings are expected to increase at about a 15 percent clip on average for the next few years, a higher level than Cendant and Sabre.

What's more, even though the U.S. online travel business may be maturing, Expedia still has ample opportunity in lucrative markets abroad. Gross bookings (the value of travel orders placed on the company's sites) and revenue from international segments accounted for about 20 percent of total gross bookings and sales in the first half of 2005.

But the online travel business outside of the U.S. is more rapidly growing. In the second quarter, international gross bookings increased 73 percent from a year ago while revenue increased 58 percent.

Expedia already owns a majority stake in Chinese travel firm eLong (Research). And now that the company is a pure play online travel firm and not a part of IAC/InterActive, it should be easier for the company to make more acquisitions.

So even though it may be a turbulent time for Expedia and the travel industry right now, there appears to be enough growth ahead to ensure a smooth long-term ride for investors.

To see how Hurricane Katrina has impacted air travel, click here.

For a look at more Internet stocks, click here.

Citigroup's Mahaney does not own shares of Expedia but his firm has done investment banking for the company. Piper Jaffray's Kessler does not own the stock and his firm has not done banking for Expedia.


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