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 (NASDAQ: 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.