Morningstar | Expedia's Businesses Support Its Network Advantage and Offer Worth to Investors; Shares Undervalued
We maintain the view that investors continue to greatly underappreciate Expedia's global online travel network, the source of its narrow moat, and think now is a good time for investors to book a trip with Expedia shares. Further, we contend that the firm's competitive edge is supported by strategically wise supply and demand investment into international and vacation rentals, which are resulting in ongoing booking share gains. With shares trading at just 9 times forward enterprise value/EBITDA compared with the 11.3 times averaged over the past four years and the 13 times for peer Booking Holdings, we view shares as undervalued.Our conviction that Expedia shares currently offer long-term investors an attractive margin of safety is buoyed by our detailed sum-of-the-parts analysis on the company's four segments (core online travel agency, HomeAway, Egencia, and Trivago) that drive a $167 valuation, a 7% discount to our $180 discounted cash flow fair value estimate. Our fair value estimate incorporates 9.6% and 8.9% average annual sales growth and operating margins over the next five years (versus a 6.2% estimated operating margin in 2018).
At the current share price of $115, we believe investors are either getting Expedia's attractive HomeAway vacation rental brand for free, (which exhibits network advantages and we believe is worth $58 per share), or valuing the main OTA business, (which also holds a network effect with a value of $149 per share, in our view), at less than half the multiple the market currently is willing to pay for Booking Holdings, the company's main peer. Beyond Expedia's Core OTA and HomeAway segments, we believe The Egencia corporate brand offers share expansion opportunity in a lower-growth market, creating $6 per share in value, while the larger disadvantaged Trivago metasearch division generates a $13 per share value. Excluding around $60 per share in unallocated costs results in our $167 sum-of-the-parts valuation.
For further information regarding our sum-of-the-parts analysis on Expedia, please refer to our report, "Expedia Parts Sum Up to Attractive Worth for Investors."
Expedia Group is an online travel company. The company's portfolio of brands includes: Expedia.com?, an online travel brand; Hotels.com?, a global lodging company operating websites with its Hotels.com? Rewards loyalty program; Vrbo?, a global online marketplace with a focus on providing lodging options for families; Egencia?, a corporate travel management company; Hotwire?, an online travel website providing spontaneous travel through its Hot Rate? deals; trivago?, an online hotel metasearch platform; and SilverRail Technologies, Inc., provider of a global rail retail and distribution platform connecting rail carriers and suppliers to both online and offline travel distributors.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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