At the end of July on-line travel company Expedia (EXPE) announced their quarter 2 results . The result was above expectations but the stock is trading close to 52-week lows. Concerns about the macro environment are a key issue facing EXPE.
At Valuecruncher we decided to put some numbers around the future performance of EXPE using our on-line valuation tool.
EXPE grew revenues from US$1.8 billion in 2004 to US$2.7 billion in 2007 – a 14% compound annual growth rate. Our assumptions of revenues for the next three years are US$3.0 billion in 2008 growing to US$3.75 billion in 2010 – a 12% compound annual growth rate (2007-10). We have projected EBITDA margins to be flat at 25% to 2010. We have used a terminal growth rate of 3.75%. We calculated this terminal growth rate based on year three (2009-10) growth of 10% dropping to a 3.0% stable growth rate by year 10. We used a terminal capital expenditure number of US$150 million. We have used a WACC (discount rate) of 12.0%.
The key assumptions as we see them are:
EXPE Revenues for the next three years. We believe that 12% per annum growth (2007-10) is a reasonable estimate.
EXPE WACC. We view EXPE’s WACC in the 11-13% range. We took a mid-point. This discount rate is intended to reflect the potential uncertainties of the EXPE cash flows in the near term.
Our analysis incorporates the cash and debt on the EXPE balance sheet – Valuecruncher calculates a net debt number.
Our analysis gives a valuation of US$23.21 per share which is 20% above the current share price of US$19.27.
Based on our analysis the current share price looks cheap. Play with our assumptions – what does your analysis say?