Atlantic Likes Expedia's 'Diversifying Of Earnings Sources,' Upgrades To Overweight

Atlantic Equities’ James Cordwell expects meaningful growth to be driven over the next three years for Expedia Inc EXPE by the company’s non-core OTA assets, HomeAway, Orbitz and trivago.

Cordwell upgraded the rating on the company from Neutral to Overweight, with a price target of $130.

Consensus Forecasts Unchallenging

The analyst believes the consensus expectations appear “relatively unchallenging,” even if a conservative outlook is assumed for the core OTA business.

Cordwell expects the diversification to also help drive the stock’s multiple, while also expecting the total EBITDA to grow from $1.17 billion in 2015 to $2.45 billion in 2018, with $760 million of the increase being contributed by HomeAway, Orbitz and trivago.

Growth Expectations

“We model $326m adj. EBITDA from vacation rental site HomeAway, ~250 percent growth from the 2015 total as Expedia shifts the site's business model from being listings- to commission-based and an increasing proportion of bookings are transacted online and incur the traveler fee,” the analyst mentioned.

Cordwell pointed out this was expected to drive a meaningful increase in the effective take rate of 3 percent. With advertising spend also expected to rise, the analyst expects margin expansion along with revenue growth from 2015 to 2018.

“We model metasearch site trivago generating $140m FY18 adj. EBITDA driven by rising profitability in its most established markets and easing investment in international expansion,” the analyst stated.

For Orbitz, Cordwell estimates the FY18 EBITDA at $292 million, driven primarily by cost synergies, as well as modest underlying growth.