Shares of Expedia (EXPE) were falling 1.2% in recent trading following a downgrade from Barclays.
Today, analyst Anthony DiClemente lowered his rating on the stock to Underweight with a $34 price target, about 19.6% below the stock’s current price.
DiClemente wrote in a note that the Street is overly optimistic about the company’s previous quarterly results and share repurchase plan, and that growth may be challenged ahead.
Read highlights from his report below:
On the heels of a 31% rise in EXPE since 1Q12 earnings (vs SPX -0.1%), we are downgrading to 3-Underweight. While we came out of 1Q12 incrementally positive and maintain our $34 price target, we would avoid EXPE at present based on:
1) Pricing: We think the Street is overly optimistic on the potential for Expedia’s new platform to deliver continued “high-quality” growth as we believe domestic hotel transaction growth is being driven by deep discounting and at the expense of margins. Revenue per room-night was down 6% in 1Q12, and while EXPE pointed to a mix shift toward lower price rooms in Asia, we believe some of the weakness also came from continued discounting as EXPE’s gap between ADR and revenue per room night growth has risen to 6-7% over the last 3 quarters, above its 7+ year average of ~3%.
2) Buybacks: Excitement around the new 20M share buyback program and the speed of repurchases may be aggressive as (a) EXPE only has ~$1.9B in cash in the U.S. today, of which ~$1.6B does not really belong to it as it is coming from Deferred Merchant Bookings, (b) EXPE may need to hold on to some cash to be acquisitive in new geographies, and (c) it would cost EXPE ~$850M to repurchase 20M shares at current price, expensive vs. the $300M of cash EXPE actually “owns” in the U.S. today.
3) Valuation: Current valuation on Expedia of ~8x 2012 guided EBITDA of $746M (5% Y/Y FY12 EBITDA growth at the midpoint) improved ~2 full turns versus the ~6x on guided EBITDA Expedia was trading at going into 1Q12 earnings, which is material multiple expansion in light of the actual improvement in 1Q in which full year EBITDA guidance did not change, the EBITDA beat was largely driven by a $17M one time selling & marking efficiency, and comps and FX should be significant headwinds in 2Q. Also, 1Q only typically represents 10-15% of EBITDA for the full year.