Is EXPE's Rise Indicative of Overvaluation?

One of Wall Street's biggest winners of the day is Expedia, a integrated freight & logistics company whose shares have climbed 4.0% to a price of $110.0 -- 14.62% below its average analyst target price of $128.83.

The average analyst rating for the stock is buy. EXPE may have outstripped the S&P 500 index by 4.0% so far today, but it has lagged behind the index by 10.0% over the last year, returning 1.0%.

Expedia Group, Inc. operates as an online travel company in the United States and internationally. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.

Expedia's trailing 12 month P/E ratio is 19.2, based on its trailing EPS of $5.74. The company has a forward P/E ratio of 9.3 according to its forward EPS of $11.8 -- which is an estimate of what its earnings will look like in the next quarter.

The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the consumer discretionary sector has an average P/E ratio of 22.33, and the average for the S&P 500 is 15.97.

The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.

When we divide Expedia's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of 0.43. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing EXPE's growth potential .

To better understand the strength of Expedia's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:

Date Reported Total Revenue ($ k) Operating Expenses ($ k) Operating Margins (%) YoY Growth (%)
2023-02-10 11,667,000 -8,844,000 10 233.33
2022-02-11 8,598,000 -6,815,000 3 110.71
2021-02-12 5,199,000 -5,064,000 -28 -450.0
2020-04-29 12,067,000 -9,074,000 8 0.0
2019-04-29 11,223,000 -8,517,000 8 33.33
2018-02-14 10,060,000 -7,661,000 6
  • Average operating margins: 1.2 %
  • Average operating margins growth rate: 8.9 %
  • Coefficient of variability (lower numbers indicate less volatility): 1241.4 %

Expedia's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:

Date Reported Cash Flow from Operations ($ k) Capital expenditures ($ k) Free Cash Flow ($ k) YoY Growth (%)
2023-02-10 3,440,000 -662,000 4,102,000 -7.22
2022-02-11 3,748,000 -673,000 4,421,000 245.57
2021-02-12 -3,834,000 -797,000 -3,037,000 -177.34
2020-04-29 2,767,000 -1,160,000 3,927,000 37.64
2019-04-29 1,975,000 -878,000 2,853,000 11.66
2018-02-14 1,845,000 -710,000 2,555,000
  • Average free cash flow: $2.47 Billion
  • Average free cash flown growth rate: 0.0 %
  • Coefficient of variability (lower numbers indicating more stability): 15205240070.4 %

Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, EXPE is in a position to do either -- which can encourage more investors to place their capital in the company.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Expedia's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 9, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.12 as of the first quarter of 2023.

With an average P/E ratio, an elevated P/B ratio, and irregular cash flows with a flat trend, we can conclude that Expedia is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a positive growth rate, and an inflated PEG ratio.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.