4 Reasons Expedia Got An Upgrade From Citi

Analysts at Citi are now recommending investors buy shares of Expedia Inc EXPE even though the stock has already gained 30 percent in 2017 alone and nearly 50 percent over the past year. Citi's Mark May upgraded Expedia's stock rating from Neutral to Buy with a price target boosted from $138 to $178 for four main reasons.

1. Positive Growth Outlook

2. HomeAway Unit

Expedia faces an easier comp for its HomeAway unit from the shift to new, lower priced subscription tiers, May stated (check out his track record here). The business will also benefit from a growing portion of listings that are online bookable, which in turn leads to incremental transactional fees.

3. Free Cash Flow

4. Valuation

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Expedia's second quarter could mark a "positive inflection point" for the company, as it will benefit from a favorable mix shift toward faster growing businesses, May noted. This will help mark an acceleration in total lodging room night growth of 17 percent in the second quarter and 19 percent for the bottom half of 2017. By comparison, total lodging room night growth was just 12 percent in the fiscal first quarter.

In addition, room night growth should be seen as the best indicator of earnings growth.

Within the next three to four years, the HomeAway business will generate more than $2 billion in revenue and at least $600 million in EBITDA annually.

Expedia generates approximately $1.5 billion in annual free cash flow on top of its $3 billion in cash and equivalents. This puts the company in great position to accelerate its stock buyback program and/or use cash for strategic acquisitions.

This aspect alone provides a "level of support in the event of a pullback in shares," the analyst further argued.

Expedia's stock is trading at just 8.7x EV/Adjusted 2018 EBITDA, which is notably below Priceline Group Inc PCLN at 15.0x. Among the two travel names, the analyst prefers Expedia's stock as more attractive than Priceline on a growth-adjusted basis.