Last week I traveled to Baltimore for the monthly editorial meeting for Taipan Publishing Group.  Shortly before leaving my home office in Atlanta, I booked a hotel using Expedia Inc. (EXPE).  Similar to previous trips, I was pleased with the choices available both from a price standpoint as well as the number of available choices.  After a few short clicks I was on my way.

The past year has not been kind to companies operating in the travel industry.  First high oil prices caused fares to quickly rise – dampening demand for transportation.  Then, as if one crisis wasn’t enough, a global slowdown and lack of consumer credit hit travel demand from the other side.  The result  has been a sharp decline in the share price and extreme pessimism around the industry.

To illustrate the uncertainty surrounding the  travel business, consider this quote from Barry Diller, Chairman of Expedia… Mr. Diller states that it is a “difficult environment… any predictions about its depth or duration would be foolish.”  However, despite the difficulties, Diller states that the company is well capitalized, extremely focused on the travel business with no distractions, and he is convinced that they will emerge a stronger competitor.

Interestingly, despite the dour environment, the company sill managed to grow revenue (if only by 10%).  While trends in October may cause the fourth quarter revenue to be below last year, the situation is not so dour as to cancel out positive earnings.  And a stock price in the mid 7 dollar range seems to more than adequately discount the challenges and uncertainty.

Expedia is not sitting idly by and hoping this storm will blow over.  Instead, management is active in pairing back any un-necessary expenses.  Since sales and marketing were at levels that equal 35.6% of the revenue for the quarter, this is likely an area that will be trimmed.  However, management is cognizant that investments must still be made in order to maintain market share and emerge as a strong player.  Encouraging data points include new signed agreements with major hotel chains (including Marriott International) and a completed acquisition of Venere SpA.  This acquisition will expand the company’s footprint in Europe, the Middle East and Africa.  Since most sales growth is coming from International markets, this move appears to be worthwhile.

Management appears to have a very strong commitment to protecting the capital base of the company.  This is especially important during a period where access to funding is very tight.  This limited credit will likely cause a few competitors to go out of business, making for a better playing field for the company when better days arrive.

One final headwind noted by the company appears to be reversing.  Previously, a strong US Dollar has caused international travel to become more expensive.  However, it now appears that the Dollar is backing off its highs which could reverse the trend and cause it to become less expensive to visit foreign destinations.  Time will tell if this new trend will follow through, but with the amount of cash flooding the US economy, it wouldn’t surprise me to see the Dollar drop in relation to a basket of other currencies.

So in summary, despite a challenging environment, it appears that EXPE offers investors an interesting value.  There will certainly be plenty of volatility in this name and a turnaround won’t happen overnight.  But I do expect that in six to twelve months, we will see better prices as fear becomes less of an issue.

FD: Author does not have a position in EXPE
EXPE Notes

Additional Reading:
Barrons: EXPE Pressures Orbitz, Priceline
Barrons: Travel Stock may Head North