Expedia Inc (NASDAQ:EXPE) was up 3 pts (13%) yesterday in after hours trading after the online travel company announced its intention to break into two separate operating units: 1) core Expedia and 2) TripAdvisor.
While most of the analyst community sees the news as a mild positive for the stock, RBC Capital analyst Ross Sandler is out with an interesting trading call, telling clients to actually fade the rally:
– The rationale is simple, at $22.40 investors are paying 4.6x OIBDA for core Expedia if we were to assign a peer-average vertical content multiple to TripAdvisor (10x). We think Trip deserves the 10x, given its dominant position in the travel content space. Recent M+A multiples for quality niche content assets are ~12x forward OIBDA (INET, RATE, etc), which we don’t expect to realize immediately upon spin for Trip, and given the one-time Google Places organic traffic step-down, we believe 10x is warranted. For core Expedia, we think the correct multiple is ~6x OIBDA, which is likely a conservative estimate of what a potential acquirer would pay for a slow growth OTA asset, especially given recent eDreams, Go Voyages and Opodo transactions at 10x-12x OIBDA. While we could see shares drift higher in anticipation of the spin and a possible FY guidance raise this quarter to account for the AA deal, history would suggest that fading this rally may be the right call. EXPE remains Outperform rated and our $28 target is based on 15x EPS, 8x OIBDA and a 10% FCF Yield.
Obvious Spin Positives: Removing the conglomerate multiple discount is the value creation behind the spin. Additionally, Trip can now operate independently, and in theory, invest to re-accelerate growth. Assigning 10x 2011 OIBDA for Trip and 6x for core Expedia, with full cost allocation, generates a $25 target valuation; shares traded close to our fair value in post-market trading.
Potential Spin Negatives: While Trip can operate independently, core EXPE benefits greatly from Trip ownership with essentially zero cash-cost “barter” advertising on Trip that it will now have to pay for, or risk Trip allocating that inventory elsewhere (assuming there is demand). We could see selling pressure in either company post-spin from investors who want to only own one or neither, which we witnessed post the IACI break-up, including Liberty Media’s 18% stake. Lastly, we don’t know details of the capitalizations, but core EXPE is likely to assume the $1B net debt, which may limit its flexibility to improve the business, which happened to some of the debt-burdened IAC spinco’s.
IACI Spin Analysis: IAC’s one-to-five spin vastly underperformed the Nasdaq and S+P over a 3 month, 6 month, and to-date basis , as did EXPE post its initial spin from IAC. IAC underperformed the Nasdaq and S+P by ~25% from announcement to close of the spin, which could have been exacerbated by the Diller-Malone lawsuit. While these assets are different, as is the investment climate and the ownership dynamics, there is risk that history could repeat itself.
Notablecalls: It appears Barry Diller, Chairman and majority owner of Expedia is back to his old tricks. As many of you probably remember, Expedia is actually a spin off of IACI, which is chaired by none else than Diller himself.
I see a 3 reasons to keep EXPE on the radar this morning:
– While most of the analyst community sees the break-up news as a mild positive for the stock, there are no upgrades or notable target raises this morning. Even the more bullish Tripadvisor valuation scenarios only reach $28-30 for the current combined entity.
– The stock has been acting heavy even in light of positive news. I highlighted a rather major upgrade from Citigroup on March 8 but the stock failed to produce a meaningful move.
On Monday the company announced a favourable settlement with AMR (NYSE:AMR). The stock gapped up +1pt the following morning but only to give up the gain over the next couple of days.
– I like the fact the RBC analyst making the fade call is actually a l-t bull in the name. That I think lends some credibility to the call. I also like his IACI comparison.
The stock is likely to open in the $25-26 range (where it traded in after hours) & I think watching for topping action and fading the strength may be the way to go here.
On the other hand, shorting the name may be such an obvious trade it ends up trapping everyone causing the stock to squeeze eventually. Several million shares were bought last night. These guys are either super smart or super trapped. So adjust your risk accordingly.
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