Saturday, May 27, 2006
Third time's the charm
Oh, Expedia…I think she's still worth the trouble. Here are a few quick thoughts why.
Thesis tested, again
Priced attractively given recent guidance
- Shares are fully valued assuming no growth scenario; assume growth as the margin of safety.
- Favorable cash flow cycle gives EXPE an attractive FCF yield of 10-11%.
- The Company is well capitalized with ample cash and positive net debt.
Growth adds value to the enterprise and opportunities are abundant
- A back of the envelope ROIC calculation (excludes ~$2.7B of goodwill for original Expedia purchase from MSFT) implies returns above WACC; thus, a franchise exists and EXPE can profitably grow within that franchise.
- International markets are relatively young and growing quickly.
- Expedia Corporate Travel is gaining momentum; I continue to believe that travel procurement outsourcing provides significant cost savings to companies.
- TripAdvisor is a unique asset: the only online travel community, trip reviews increased from 1M to 4M in 2005, potential for increased monetization
Short-term, ‘quick hits’ are underway
- Expedia announced a 20M share buyback.
- Project Apollo is fully scoped and workstreams are pursuing cost savings.
- Sales & Marketing strategies are being re-thought: more targeted, clearer Expedia value proposition.
- Loyalty program to be launched in 2H06.
Action taken
Having said that, I recently sold my EXPE shares for a loss. Then, I bought EXPEZ warrants. I reduced my total dollar investment (which was mistakenly too high as percentage of total assets) and purchased control over more shares than I previously held.
The instrument:
"Each Stockholder EXPEZ warrant entitles its owner to purchase 0.969375 shares of Expedia common stock at an exercise price equal to $11.56 per warrant. The exercise price must be paid in cash. Each Stockholder EXPEZ Warrant may be exercised on any business day on or prior to February 4, 2009."
I’m not familiar with warrant valuation and pricing, but I stumbled upon something that seemed a little peculiar:
At a first glance, it seems that EXPEZ warrants have taken an unfair beating over the last several months. So, I took a stab at valuing them.
Note: I know very little about option pricing. I've completed this exercise to reality-check my decision.
First, I valued the warrants assuming a Black-Scholes call option valuation. My model valued the warrants at $5,62.
Unfortunately, warrants are not the same as call options and have to be valued differently. I don’t know how to value warrants explicitly, but I found a useful model online. The price curve implies a value of $5,05 – 6,35.
Seeing that the online model was close to the Black Scholes value, I rounded my estimate to $5,50. EXPEZ has recently been trading around $4,40.
Outlook
I can’t tell you where we head from here; I see few near-term catalysts. Any short-selling here would be unwise given that EXPE has real assets that produce cash and have the potential to surprise the market as much to the upside (Nov. 2005) as to the downside.
I’d love to know what Bill Miller and Legg Mason are doing with their shares these days. If MMs continue to unload, I’d expect continued weakness in the near-term. Following two earnings misses, most buyers have left the building.
Good luck,
RMA
# posted by RMA @ 08:12 
Comments:
<< Home
RMA:
It is almost scary how you & I share similar ideas. PRZ was on my notes when you wrote about it a few days ago. And I bought EXPEZ on 5/25 (2,500 shares with avg.cost at $4.47). I also own 6,643 shares of EXPEW at $1.51 - bought on 5/24 and 5/25. BTW, are you at all looking at RMBS? I am.
Post a Comment
It is almost scary how you & I share similar ideas. PRZ was on my notes when you wrote about it a few days ago. And I bought EXPEZ on 5/25 (2,500 shares with avg.cost at $4.47). I also own 6,643 shares of EXPEW at $1.51 - bought on 5/24 and 5/25. BTW, are you at all looking at RMBS? I am.
<< Home
