HEDGEYE EDGE
Are we back to the same old EXPE? You know, the low-quality collection of “travel” brands that just can’t string more than a few quarters together. Today, it may seem that way, and perhaps deservedly so. We were banking on the company putting up a clean Q4 beat across the board and guiding to healthy growth in ’24 which would catalyze some positive estimate revisions. Taking a step back we can admit that we got some of what we were looking for, but not enough for the stock to work after its big move post-Q3. Indeed, while the company did beat on revenues and EBITDA, the beat was smaller than expected, driven by softer than modeled non-lodging (mostly Air) related bookings and revenues. As for the guide, the read on ’24 is respectable and very attainable (LDD top line + margin expansion), but the slowdown in Q1 and implications for 1H are softer than we had been modeling. The net effect of the guide should set up EXPE to accelerate growth through the year as they begin to lap their easiest of comparisons (May – September). We like the sound of that growth cadence and were mostly expecting that to be the case, but the Q1 guide and near term “pressures” give us a little more pause than usual.
Back to the original question of today… is this the same old EXPE? No, we don’t think it is. While there’s still a lot for this management team to prove, the company is in a much better spot today compared to pre-Covid and vs the prior year. The lodging business is firing on all cylinders and taking center stage, margins are expanding, and there’s a conscious effort to accretively buy back stock and grow earnings and FCF per share. The long-term bull case is playing out, but some quarters it’s easier to see than others. That said, the bear case, predicated on inconsistent results, a poor IR function, near-term uncertainty, and yet another CEO transition, might dominate for the time being. Not ideal for stock that has rocketed >75% off its early November lows.
So, if we think the bear case can dominate for the near term, is EXPE a short? No, we don’t think it’s a great short. But it doesn’t deserve Best Idea Long status, either. After today’s likely drawdown, this already cheap stock is about to get cheaper, but its positive catalysts are also getting pushed out. Importantly, we’re still believers in EXPE’s broader pivot to offense which will eventually drive faster bookings growth, improved lodging mix, and accelerated margin expansion. Again, EXPE is becoming a better company, and its valuation will eventually reflect that improvement. For now, though, the near term looks choppier than expected, and our numbers have inched closer to the Street – generally not what we like to see following a print.
All considered, after a few years of strong cumulative performance (and at times, volatility), we’re moving EXPE off our Best Idea Long list and down a notch to our Long Bias list.
q4 review
Negatives: There weren’t many negatives from the print that have long term implications for the company, but there was more for the bears to latch onto vs prior quarter.
- Total Bookings missed expectations for the 3rd quarter in a row, predominantly driven by the lower margin Agency line. Not a factor for profits (EBITDA beat), but another miss here. Importantly, non-lodging segments are where we, and presumably others, have the least visibility.
- Total Revenues came in slightly above but the lack of follow through from Q3, where EXPE beat by a wider margin just didn’t happen – even with Lodging revenues accelerating on the print.
- Marketing De-Leveraged in the quarter again, which was not the expectation. Save the excuses around B2B commissions – the company needs to do a better job of presenting its results. Or simply show real leverage.
- Q1 Guidance came in softer than expected with the implied LSD bookings growth and only MSD revenue growth with EBITDA needing to then be reset much lower on the back of their margin comments. We had modeled deceleration, but this reset lower, even in the context of the full year guide, is a net negative. Air and Vrbo are the main culprits here – we expected a weaker Vrbo Q1 but also expected Expedia and Hotels.com to offset the softness. Management didn’t seem willing to sign off on the latter.
- Numbers heading lower post-print. Our numbers are sagging lower towards consensus, which to us is a big factor vs the implied P&L acceleration through the year.
- CEO heading for the exits at a time when the company is gearing up to accelerate and really showcase all its improvements. We understand Kern came here to do a job and for the most part he succeeded, but the timing of the departure could have been communicated better and for some, adds confusion to the story.
Positives: There were positives, most of which will be lost in the shuffle today.
- Fixed cost leverage controls were strong again and EXPE seems to be controlling the controllables very well, not easy to do in today’s environment (cc: hotel companies). This is a consistent theme quarter to quarter.
- Cost of revenue was also favorable vs model as EXPE continues to drive higher gross profit (GP) margins which improved ~780bps vs ’19 and ~400bps YoY.
- Lodging Revenue growth continues to charge ahead and accelerated to +14% YoY and +26% vs ’19. When backing out Egencia from the ’19 comp base, lodging revenues were even stronger, accelerating to +38% vs ‘19.
- Lodging Revenue mix climbed another ~290bps YoY, and 1,000bps vs ’19. Long term, success is about growing the lodging business and EXPE is succeeding here.
- Buyback continues to deliver, which has been a welcomed development over the LTM and should serve as a nice value driver and cushion under the stock.
- ’24 Guidance provided some assurances that this business is in growth mode, but this point was mostly lost in the shuffle.
final word | DOWNSHIFTING TO LONG BIAS LIST
Unlike the prior print, the Q4 release, conference call, and questions following the call are decidedly more controversial. The company’s inflection from defense to offense is ongoing, and there were positive signs in the print, but ultimately not enough for us to completely “hold the line” on this idea. EXPE has now put up 3 EBITDA beats in a row, but the inconsistency around total bookings, total revenues, and marketing spend remains an issue. There’s been plenty of consistency on the lodging side – in particular hotels – where the company is putting up big numbers and in the case of lodging revenues, accelerating growth. For the long term, EXPE’s lodging segment will decide its future growth and margin profile, but the non-lodging segment (still 20% of revs and 30% of bookings) will be a headwind at times. Given what we know post-print, the current setup just looks a little more “headwindy” than previously expected, and much of it is non-core non-lodging related.
On reset numbers (read: lower), a move down the priority and conviction list seems prudent. As noted below, the risk / reward appears more balanced from here, with the more aggressive bull case probably off the table until we see clearer signs of total company acceleration, not just lodging acceleration. After am extended run on Best Ideas List, EXPE moves down to our Long Bias list.
