Expedia’s stock price at the top level with growing revenues and sound capital structure

Expedia, Inc. provides branded online travel services for leisure and small business travellers. The company offers a varied array of travel shopping and reservation services, providing real-time access to schedule, pricing and availability information for airlines, hotels, and car rental companies.

Strong revenue growth, however higher sales, marketing and advertisement expenses played a negative role at the net income level

Expedia registered a robust revenue growth of 18% for the year ended December 2013, clocking in revenues of $4.77 billion as compared to $4.03 billion in fiscal year 2012. However, at the operating income level, numbers were disappointing considering it declined by 15% on a year-on-year basis.

This decline was largely led by higher sales, marketing and advertisement expenses which is the key driver of cost (this cost head grew by 28% in the fiscal year 2013). In common-size terms, sales, marketing and advertisement expenses as a % of revenues came in at 46% for fiscal year 2013 as compared to 43% for fiscal year 2012.

Decline in operating income has taken a toll of the net income which fell by similar proportions. In the latest quarter ending June 2014, Expedia reported strong revenue growth of 24% on a year-on-year basis with similar growth at the net income level.

EPS fell in line with operating income; marginally conservative approach in dividend pay-outs

EPS (FY2013: $1.73, FY2012: $2.09) of the company has dropped by 17% in latest annual results, which is no amaze considering net income has also fallen at similar levels. However, the company has been marginally conservative in paying dividends to create a buffer in the last fiscal with dividend pay-out ratio (calculated as dividend per share divided by earnings per share) trimming to 32% from 46% in fiscal year 2012.

Market consensus

Market consensus paints in an appealing picture for Expedia in line with the historical numbers. Revenues, net income and EPS are all expected to grow handsomely in subsequent fiscal years. As per the consensus, further dividends are also expected to grow considering sound capital structure of the company. The following snapshot captures in market hopes for Expedia in terms of its financial performance:

Sound capital structure with Long-Term Debt to Equity ratio at 0.5 times

Company’s long term debt has remained flat for the fiscal year 2013 at $1.25 billion and the Long-Term Debt to Equity ratio is at reasonable levels of 0.5 times. Considering, the company is not into capital-intensive business and cash in books at $1.02 billion as of December 2013, the company’s capital structure is financially sound. Moroever, cash flow generated from operations will suffice for dividend payment going forward.

Upcoming events

The Company is expected to 1) be at Deutsche Bank Technology Conference on 9 September 2014, and 2) announce its 3rd quarterly results on 30 October 2014 (Tentative).

Major shareholders

Following are 3 major shareholders of company:

Diller (Barry) 13.22% holding with 15.13m shares

Capital World Investors 8.74% holding with 10.00m shares

The Vanguard Group, Inc. 6.27% holding with 7.17m shares

Significant change in shareholding

Following are the major shareholding transactions that took place recently:

Contour Asset Management LLC buying 1.13 million shares

JANA Partners LLC selling 2.70 million shares

Sustained earnings growth has led to structural growth in stock price over the longer-term, stock price currently hovers at peak