Expedia, Once Dog, Now Top Pick After "Surprising" Q1

Having scored on Priceline (PCLN) in Q1, Citi’s Mark Mahaney has switched his bet to the beaten down Expedia (EXPE)–and maintains this after a “surprisingly healthy” Q1. He does cut his price target, however.

  • Expedia Reported A Surprisingly Healthy March Quarter – $688MM in revenue & $0.24 Adjusted EPS vs. Street estimates of $658MM, & $0.23, respectively. OIBA of $126MM was up 21% Y/Y. Revenue upside came from the Domestic segment ($21MM or 5% upside) and the European segment ($8MM or 5%).
  • Solid Fundamental Trends With Accelerating Organic Revenue Growth – Organic revenue growth (adjusting for FX and acquisitions) was approximately 20.2% Y/Y, an acceleration vs. the 19.3% Y/Y growth reported in Q4 and 19.6% in Q3. OIBA margin was down 70 bps Y/Y to 18.3%, slightly better than our 18.2% estimate. Advertising revenue of $64MM was a material positive.
  • EXPE Trading Off 2% – We attribute this small move to: 1) Concerns re: lower than expected tax rate (36.8% vs. 38%) – but the magnitude was immaterial to EPS; 2) European bookings growth deceleration – valid point; 3) Incrementally more cautious comments re: the U.S. travel sector – you’re not surprised, are you? & 4) Guidance that implies a more back-end loaded ’08 – valid point.
  • But We View Long Thesis As Well Intact – 1) Secular growth in online travel; 2) Demonstrating improved execution; 3) EXPE’s relations & economics with travel suppliers are stabilizing; 4) EXPE is showing countercyclical hedges – greater inventory access; 5) High margin (and high multiple) advertising rev. continues to grow; and 6) Valuation is very attractive – 9% ’08 FCF yield.
  • Trimming PT to $37 – ’08 Adj. EPS from $1.46 to $1.47. $37 = 12X ’09 EBITDA/25X ’09 GAAP EPS for sustainable 14% EPS growth & strong FCF.

See Also: Moonshot Priceline Cut at Citi: Too Pricey

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