INTRODUCTION: Our sense is that there are three main drivers to the story right now: 1) the OWW integration (2016 EBITDA target), 2) the longer-term AWAY story, and 3) the current travel environment. We discussed the first two factors in detail in the below notes (links below); the common takeaway is that mgmt is largely in control of both. We will discuss the third factor below in more detail on our upcoming call. But in short, if EXPE delivers on its EBITDA target as we expect in the face of these telegraphed global travel headwinds, the stock should work from here; especially if it shows progress on AWAY. We’re adding EXPE as a Best Idea long with an expected duration of 6-9 months. We will be hosting a call Friday, July 8th at 11am EDT to run through our detailed analysis
KEY POINTS
- IT’S LARGELY A COST STORY: Consensus appears to have some doubts around EXPE’s ability to hit its EBITDA target, with current estimates below the midpoint (37% vs. 40%). However, we estimate that EXPE’s EBITDA target is effectively in the low 20% range after considering its 2015 purchase accounting headwinds. EXPE could hit that target largely on the cost side alone through its strategy to cut redundant/duplicate costs. Moreover, mgmt maintains two additional levers it can pull: 1) curbing OWW’s marketing spend (3x its EBITDA) since growing brand awareness for OWW’s is largely counterproductive, and 2) categorizing certain expenses as non-recurring to shift them out of its non-GAAP figures, in turn inflating its reported Adjusted EBITDA. In short, mgmt is largely in control here.
- PAY TO PLAY: The AWAY model transition presents considerable near-term opportunity, which isn’t based on growing into some distant TAM, but capturing a take of the estimates $15B in bookings that its current subs are generating from the service today. There’s been some pushback from AWAY’s subs, so there is some execution risk on the online bookability opt-in. But, EXPE basically holds all the cards here since AWAY’s subs earn too much money off the platform to push back, and bear all the financial risk. Timing issues will limit the total 2016 opportunity, but very small progress with the user fee will go a long way toward proving out EXPE's EBITDA target. More importantly, mgmt really only needs to show progress to drive sentiment around the story – that AWAY is a material long-term contributor, after all – and given that AWAY’s results are now largely behind the curtain, mgmt can cherry pick any metric it wants to do so. Once again, mgmt is largely in control here as well.
- THE END ISN’T NIGH: We’re all freaked out about decelerating travel trends, especially in the wake of Brexit. But we suspect most outside of the sell-side are already bracing for it. First, mgmt had already guided to decelerating room night growth through 2016, and cautioned of softening travel trends on its 6/6/16 investor event, which was corroborated by the STR data that we’re all watching. The stock had since been giving back much of its 1Q16 post-print gains, Brexit basically eviscerated the remainder. But it’s important to note that leisure and business trends may be diverging; the latter was the source of cautious commentary from both EXPE and the public hotels. Either way, occupancy trends are not awful; they’re still positive y/y. Further, if Brexit does emerge as a travel headwind, EXPE may be the OTA that is most-insulated given its higher proportion of US travelers (strong dollar, more limited Brexit exposure) and hotel bookings that favor the merchant model (limiting cancelation risk). We will run through the supporting detail/analysis for this section on our upcoming call next Friday at 11am EDT.
EXPE | “It’s Largely a Cost Story”
06/28/16 08:29 AM EDT
[click here]
EXPE | Pay to Play (HomeAway)
06/17/16 09:28 AM EDT
[click here]
Links to our prior two notes are above. Let us know if you have questions, or would like to discuss in more detail.