Expedia Inc. (NASDAQ:EXPE), one of the largest online travel companies, will announce its Q4 2013 earnings on 6 Feb, 2013. The earnings release is scheduled at 4:00 PM EST followed by the conference call at 4:30 PM. We rate the company high for its growth while the profit margins have been inconsistent and worrisome. EXPE stock fell by over 4% on Jan 22, following reports of expedia.com falling in Google search rankings. Does the latest fall represent a buying opportunity for a long term investor? Or is the stock still expensive considering its current valuation multiples? The quarterly earnings release will help investors answer these questions and just to give you a headstart, we provide a preview on Expedia Inc.’s upcoming earnings release.
Expedia: A growth engine with bottom line concerns
Expedia Inc. has been ahead of most online travel companies when you consider topline growth which the company generates. However, the company has been unable to convert revenue growth into substantial growth for investors, in terms of earnings growth. The chart below displays Expedia Inc.’s revenue and earnings growth over the last 4 quarters.
The above chart clearly displays the company’s inability to convert topline growth into similar earnings growth, which leads us to examine the profit margins of the company over the last four quarters. The table below displays the Y/Y % change in the company’s profit margins.
|YoY change in margins||Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Operating margin (in %)||18.6||-16.4||-7.0||-1.9|
|EBITDA margin (in %)||19.7||-15.6||-6.3||-1.4|
|Net income margin (in %)||-8.2||-9.9||-4.2||-2.1|
The company has seen margin contractions over the first three quarters of 2013, which has resulted in lower than proportionate growth in the earnings per share inspite of a healthy topline growth. The table below displays the company’s costs and expenses as a proportion of revenues.
Cost as % of Revenues
|Q4 2012||Q1 2013||Q2 2013||Q3 2013|
|Cost of goods sold (in %)||23.1||24.8||21.8||19.7|
|R&D Expense (in %)||13.8||13.7||11.7||10.3|
|Selling general & admin expense (in %)||61.9||70.8||57.1||51.7|
|Depreciation, depletion, amortization (in %)||1.0||1.2||1.6||1.3|
|Total operating expense (in %)||76.8||85.7||70.4||63.3|
|Operating expense + Cost of goods sold (in %)||99.8||110.4||92.2||83.0|
The company’s current cost structure has put tremendous pressure on the profit margins. The huge proportion of selling and general expenses is a reflection of the competition as Expedia tries to catch up with the industry leader Priceline (NASDAQ:PCLN). The company will need to address these cost issues immediately in order to justify its current stock price.
Earnings history and price reaction to earnings release (ER)
According to Streetinsider.com, Expedia beat analyst revenue estimates in 7 out of the last eight quarters, while missing the earnings estimates in two quarters. The stock has fluctuated wildly in response to historical earnings calls. The average one day price movement following the earnings release, over the last eight quarters, has been a 4.4%. The table below gives the earnings history and price change in response to earnings release for the last eight quarters.
|Quarter||Q3 2013||Q2 2013||Q1 2013||Q4 2012||Q3 2012||Q2 2012||Q1 2012||Q4 2011|
|ER date||30 Oct||25 Jul||25 Apr||05 Feb||25 Oct||26 Jul||26 Apr||09 Feb|
|Post ER 1 day stock price change||9||-17.8||-6.41||-1.8||7.81||9.19||7.68||-0.62|
|% change in stock price||18.0||-27.4||-9.9||-2.7||15.2||20.1||23.5||-1.8|
|Revenue beat (in %)||1.4||-4.0||4.6||4.8||2.6||5.0||3.2||0.5|
|Earnings surprise (in %)||5.1||-19.0||8.7||-3.1||4.8||25.4||73.3||7.4|
The company has an average revenue beat margin of 2% and an average earnings surprise of 5.4% over the last 8 quarters. The company has a strong history of trumping analyst estimates. The current consensus estimates, according to Streetinsider.com, is an EPS of 86 cents on quarterly revenue of $1.14 billion.
The implied growth rate in current consensus estimates is a revenue growth of 16.9%. Considering the global economic data over Q4 2013, we expect the company to comfortably trump the analyst’s revenue estimates. We expect the company to report revenue close to $1.16 billion. However, the management’s future guidance, considering the recent Google debacle, will be a key factor in the post ER price movement. Considering the historical volatility in the stock’s post ER trading, a topline growth could result in a run-up in the stock price while a miss on the growth front will hurt bullish investors. Stay tuned as we update our outlook based on the actual numbers post the Q4 2013 earnings release.
To see Expedia Inc.’s latest stock price movement, click here (NASDAQ:EXPE)