Everyone loves a bargain, especially a value investor. But if we are not careful, that bargain could be a value trap, a discounted stock that keeps going down rather than recovering.
How do we make the distinction? One good starting point is to study the fundamentals. Does it have a solid balance sheet, is it profitable, is it growing more quickly than the underlying economy? Those are a few of the criteria that help investors sort the worthwhile from the potential deadbeats.
We also can help ourselves by using a list of discounted stocks, such as the one provided by the GuruFocus screener, “Stocks That Are at 52-week lows, Owned by Gurus, Bought by Insiders.”
This screener offers stocks that are trading within 10% of their 52-week lows, are owned by gurus and have insider ownership. The latter two criteria signal that at least some professionals and the people who know the company best have faith in it.
Obviously, the screener takes most of the work out of finding cheap stocks. Just a couple of clicks and you have a starting list. Reducing that to a short list means screening by one or more criteria.
Expedia Group Inc. (EXPE, Financial) is currently on that list, so I will analyze its fundamentals to determine if it is suitable for a shortlist or should be ignored.
The company operates an iconic online travel platform, one of the industry disrupters from a couple of decades ago. These companies knocked out most traditional travel agencies by giving consumers direct access to the inventory of travel and accommodation providers.
Today, the travel industry is undergoing another potentially disruptive change. This time it is driven by artificial intelligence.
Barry Diller, the media entrepreneur and baron who is a director, chairman and senior executive at Expedia, says the company has an edge in the new revolution (or evolution).
Speaking at an Expedia Group partner conference earlier this month, he pointed out that Samuel Altman, the CEO of Open AI, the company behind ChatGPT, is a director of Expedia. According to Diller, Altman had provided a presentation on AI capabilities at a conference in November.
While the details are sketchy, Altman definitely is a director of Expedia and undoubtedly shared his knowledge with the company. That sounds like a new competitive advantage to me, one that could lead to greater market share and profitability.
Turning to more specific fundamentals, Expedia has a middling financial strength score of 5 out of 10. That is based on its debt-to-revenue ratio, its interest coverage ratio and its Altman Z-Score.
This GuruFocus illustration of its balance sheet shows Expedia carrying a heavy load of long-term debt.
That debt is enough to push its interest coverage ratio down to 4.62, which is a moderate warning flag. Same story for the Altman Z-Score, which is just 0.77, which puts it in the distress zone. At the end of 2022, it had $6.24 billion in debt versus $11.67 billion in revenue, for a debt-to-revenue ratio of 53.47. None of these figures are encouraging.
The situation is only slightly more encouraging when assessing profitability. Expedia receives a 6 out of 10 ranking for profitability. Behind that ranking is an operating margin of 9.82%, which is far below its gross margin of 85.93%, but better than the travel and leisure industry median of 5.5%.
The net margin is a dismal 2.72%, although its return on equity is a respectable 15.86%. It has been profitable in nine of the past 10 years.
There is more bad news when the focus shifts to growth, for which it receives a 2 out of 10 ranking. Its revenue, Ebitda and earnings per share without non-recurring items growth numbers are all negative.
However, remember the travel industry was among the biggest victims of the Covid-19 pandemic, which began in the first quarter of 2020. Only last year did the industry start to recover.
This five-year chart shows us how revenue plummeted as the pandemic took hold, and how it is now bouncing back.
It is much the same story for Ebitda and earnings per share without NRI. The latter is shown in this five-year chart.
We might expect even bigger and better things for the second and third quarters of this year, as there are indications many consumers plan to travel this year. As a headline on Yahoo Finance put it, “Summer Travel Demand Is Red Hot. It’ll Be Pricey, but Good for These Stocks.”
A Morningstar Inc. (MORN, Financial) analyst expects earnings per share without NRI to jump from $2.17 in 2022 to $9.24 in 2023, $11.29 in 2024 and $12.13 in 2025. Such an increase in earnings for this year alone would drive the share price significantly higher.
In the larger context, then, we can set aside the pessimism that came with data for profitability and growth over the past three years. I expect them to improve this year, while it may take several years of profitable growth to get its balance sheet back to safe territory. Further, there is no danger of financial distress in the near future, despite the poor Altman Z-Score.
One area where Expedia does have a high ranking is for value, with an 8 out of 10 score. According to the GF Value Line, Expedia is significantly undervalued—and to the point of possibly being a value trap.
The value trap warning reflects, to some extent, the bear market that took hold in early 2022. Judging by some of the headlines, there is underwhelming demand for the stock, as the market waits for more good news.
Getting back to the GF Value Line, it concludes that Expedia is worth $165.41, which is 79.35% more than its May 15 closing price of $92.23.
It has a high price-earnings multiple of 46.82, which is more than double the industry median of 19.35. The stock does not have a PEG ratio at the moment, because its five-year Ebitda is negative. Nor does it have a discounted cash flow valuation because of the low predictability of its revenue and Ebitda.
A visual inspection of the 10-year price chart suggests undervaluation:
Eleven gurus followed by GuruFocus held positions in Expedia at the end of 2022, which is a good showing. According to 13F filings, the biggest three stakes were those of Steven Cohen (Trades, Portfolio) of Point72 Asset Management (2,525,938 shares), Jim Simons (Trades, Portfolio)' Renaissance Technologies (992,561 shares) and Larry Robbins (Trades, Portfolio) of Glenview Capital Management (504,546 shares).
Institutional investors owned 65.40% of shares outstanding, while insiders held 0.88%. The biggest individual shareholder is Dara Khosrowshahi, a former CEO of Expedia and now the CEO of Uber Technologies Inc. (UBER, Financial) and an Expedia director.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
In conclusion, Expedia Group has experienced significant reversals, but is now recovering. If travel picks up this year, earnings could shoot up and pull share prices with them. In a broader sense, the company is also well-positioned for the future because of what may be a head start on the AI revolution in travel.
