Although we expect the growth rate to decelerate, we think insurance waivers, co-branded credit cards, and expanded ad revenue streams on transaction sites will supply some lift to the
Trang 1Expedia, Overweight, ($7.80)
We expect Expedia’s Y/Y revenue to fall in 2009 as the company faces decreased travel volume, falling ADRs, difficult FX ratios, and reduced airline capacity However, we do think some of the negative economic effects will be slightly offset
by strength in non-transaction revenue streams, improved conversion rates, and careful cost control measures Expedia trades at 3.6x our F’09 EBITDA estimate of
$756M, hence our Overweight rating We are introducing a $12 December 2009 price target
• We think 2009 gross bookings will decline 3% on a Y/Y basis We expect
domestic gross bookings to decline 3% due to airline capacity cuts, weak ADRs, and lower volumes We think European gross bookings will decline 10%, as we see European travel weakness mimicking that of the US and expect FX effects to contribute an additional 13 points of declines
• Non-transaction revenue could slightly offset bookings weakness Although
we expect the growth rate to decelerate, we think insurance waivers, co-branded credit cards, and expanded ad revenue streams on transaction sites will supply some lift to the 2009 revenue growth rate
• Expense cuts should aid bottom-line performance Management has
expressed its intention to manage sales and marketing spend around revenue performance Additionally, we think there is slight room for cost reductions in call centers, credit card processing fees, and air fulfillment expenses
• 2009 drivers In our view, the following factors will drive EXPE shares in 2009:
(1) advertising and other non-transaction performance, (2) cost savings returns on prior investments, and (3) ADR and air capacity trends
• Maintaining 4Q’08 estimates We are looking for revenue, EBITDA, and pro
forma EPS of $648M, $166M, and $0.27
Our current and newly introduced 2010 estimates are in the table below:
Table 111: Expedia Financial Snapshot
$ in millions, except per share data
J.P Morgan
Revenue 648.1 2,964.2 2,919.1 3,287.6 11.2% -1.5% 12.6% EBITDA 165.8 781.3 755.9 883.0 7.2% -3.3% 16.8% Pro Forma EPS 0.27 1.30 1.26 1.40 5.8% -2.6% 11.0%
Consensus
Revenue 679.3 2,971.7 2,869.8 3,063.8 11.5% -3.4% 6.8% EBITDA 169.0 757.1 713.8 745.0 3.9% -5.7% 4.4% Pro Forma EPS 0.25 1.30 1.23 1.39 6.0% -5.4% 13.0%
Source: J.P Morgan estimates, Company data, and Bloomberg
Trang 2Our Estimates and Outlook for 2009
We are modeling F’09 revenue of $2.92B, EBITDA of $756M, and pro forma EPS
of $1.26, representing Y/Y declines of 2%, 3%, and 3%, respectively We expect most of the revenue decline to be driven by the international market, where travel weakness and foreign currency exchange rate downside is expected to lead to a gross bookings decline of 10% Y/Y We think US gross bookings will be weak due to expected ADR declines and air capacity decreases, however we think the non-transactional revenue will slightly offset this Therefore, we are looking for a North America gross bookings decline of 3% Y/Y but a total revenue decline of only 2% Y/Y We expect the OIBA margin decline to moderate to only 70 bps Y/Y, as we think management will work to manage sales and marketing spend around revenue performance
Table 112: Key Booking and Revenue Y/Y Growth Trends
4Q'07 1Q'08 2Q'08 3Q'08
Advertising and Media Revenue 88.9% 73.0% 68.2% 53.7% Number of Transactions 19.3% 15.6% 10.2% 5.9% Merchant hotel room nights 18.6% 22.9% 13.6% 15.0%
Air Tickets Sold 15.0% 11.0% 4.0% -5.0%
Source: Company reports and J.P Morgan estimates
Our Estimates and Outlook for 2010
We are introducing F’10 revenue, EBITDA, and EPS estimates of $3.29B, $883M, and $1.40, which represent Y/Y growth of 13%, 17%, and 11%, respectively We expect much of the revenue growth to stem from European gross booking increases, which we modeled growing 23% Y/Y due to an expected easing of economic headwinds and flat foreign currency exchange rates Domestically, we expect gross bookings growth to rebound to 10% Y/Y from down 3% in 2009 due to an easing in economic conditions and the comping of air capacity cuts We expect OIBA margins
to decline an additional 70 bps as selling and marketing expenses rise
We Are Introducing a Price Target of $12
In introducing price targets for our coverage, we have derived multiples based on 5-year forward EBIT CAGRs We believe the historical record does not provide a meaningful guide to valuation as (a) the majority of the companies in our coverage did not have a track record as public companies through the previous recession and (b) even the public companies were still in their early-growth (and, for some, rapid growth) stage during the last economic downturn
As such, given our projection for Expedia of a ~7% F’09 - F’14 EBIT CAGR, and our view of the beginning of a possible economic turnaround in 2H’09, we believe the stock can achieve a 7x EV/EBIT multiple to our F’09 EBIT estimate (reflecting better forward visibility than the current valuation of 5x our F’09 estimate) and thus arrive at our December 2009 price target of $12
Trang 3Table 113: Growth Outlook
$ in millions
2009E 2010E 2011E 2012E 2013E 2014E
Revenues 2,919.1 3,287.6 3,616.3 3,905.6 4,140.0 4,347.0
Less: Operating Expenses 2,372.2 2,692.9 2,969.0 3,210.4 3,403.1 3,573.2
Operating Income (Loss) 546.9 594.7 647.3 695.2 736.9 773.8
Source: Company reports and J.P Morgan estimates
Table 114: EV/EBIT Multiple Analysis
$ in millions
Source: Company reports and J.P Morgan estimates
Valuation and Rating Analysis
We believe Expedia is undervalued given the potential for international growth and increased advertising revenue opportunities On an EV/EBITDA basis, Expedia trades at 3.6x our F’09 EBITDA estimate of $756 million, versus its peers at 6.5x As such, we rate the stock Overweight
Risks to Our Rating
The company’s shares could underperform if the company is unable to (1) withstand the competitive threat that the travel suppliers and travel search engines pose, (2) achieve a high ROI on selling and marketing investments, (3) achieve strong gross bookings growth in a weak economy, and (4) achieve further expansion into international markets
Trang 4Table 115: EXPE Annual Income Statement
$ in millions
Y/Y Growth
growth ex-FX
Selling and Marketing expense 980.1 1,109.7 1,098.7 1,245.2
General and Administrative expense 289.4 312.0 312.6 352.1
Total Operating Expenses 1,576.8 1,749.3 1,733.7 1,957.8 Total Operating Expenses (Pro forma) 1,436.3 1,613.9 1,602.7 1,812.8
Equity Income of Unconsolidated Affiliates - - - -
EBT (Earnings Before Taxes) 497.0 500.5 502.9 558.7
EBT (Earnings Before Taxes - Pro forma) 656.0 652.7 633.9 703.7
Source: Company reports and J.P Morgan estimates
Trang 5Table 116: EXPE Quarterly Income Statement
$ in millions
1Q'07 2Q'07 3Q'07 4Q'07 1Q'08 2Q'08 3Q'08 4Q'08E 1Q'09E 2Q'09E 3Q'09E 4Q'09E
Selling and Marketing expense 219.0 253.1 276.6 231.3 283.4 296.7 296.3 233.3 262.6 286.5 307.3 242.2 General and Administrative expense 68.5 68.7 75.7 76.5 79.5 76.7 81.4 74.5 78.5 74.9 81.0 78.3
Total Operating Expenses 362.8 393.3 429.3 391.4 446.6 456.2 457.3 389.3 420.3 439.8 474.0 399.7 Total Operating Expenses (Pro forma) 325.7 359.8 396.3 354.5 410.7 422.7 426.1 354.5 387.3 408.8 442.0 364.7
Operating Profit (Pro forma) 104.4 187.1 212.8 165.2 125.9 204.0 230.8 147.8 126.0 185.7 209.0 157.3
Operating Margin (Pro forma) 19.0% 27.1% 28.0% 24.8% 18.3% 25.7% 27.7% 22.8% 19.1% 24.3% 25.3% 23.5%
Net Interest Income (3.9) 0.7 (1.1) (9.2) (7.6) (4.3) (12.6) (11.0) (11.0) (11.0) (11.0) (11.0)
EBT (Earnings Before Taxes) 57.9 160.2 164.8 114.0 78.7 161.1 163.7 96.9 82.0 143.7 166.0 111.3 EBT (Earnings Before Taxes - Pro forma) 100.5 187.7 211.8 156.0 118.3 199.7 197.9 136.8 115.0 174.7 198.0 146.3
Income Tax Expense (23.6) (64.1) (65.5) (49.9) (29.0) (65.9) (69.2) (38.8) (32.0) (56.0) (64.7) (43.4)
Net Income (Pro Forma) 59.3 114.0 123.1 94.6 71.0 120.8 118.3 82.1 70.2 106.5 120.8 89.2
Source: Company reports and J.P Morgan estimates
Trang 6Table 117: EXPE Annual Balance Sheet
$ in millions
2007 2008E 2009E 2010E
Cash and Cash Equivalents 617.4 378.0 712.3 1,089.9
Restricted Cash and Cash Equivalents 16.7 7.1 23.0 23.0
Intangible Assets, Net 970.8 1,075.4 1,075.4 1,075.4
Long-Term Investments and Other 93.2 82.0 82.0 82.0
Property, Plant and Equipment, Net 179.5 264.2 361.1 469.5
Source: Company reports and J.P Morgan estimates
Trang 7Table 118: EXPE Annual Cash Flow Statement
$ in millions
CASH FLOW FROM OPERATIONS
Depreciation and Amortization 59.5 72.9 78.0 84.0
Amortization of non-cash distributing & mktg - - - -
Amortization of non-cash compensation expense - - - -
Amortization of intangibles & stock-based comp 140.4 135.4 131.0 145.0
Unralized gain on derivative instrument 5.7 (4.6) - -
Equity in Losses of Unconsolidated Affiliates 2.6 (0.8) (5.4) -
Minority Interest in Income of Subsidiaries (2.0) (3.1) (1.3) -
Changes in Current Assets and Current Liabilities - - - -
Accounts Payable and Accrued Liabilities 51.7 15.2 - -
CASH FLOW FROM INVESTING
Proceeds from Sale of Marketable Securities - - - -
Increase in Long-Term Investments & Notes Rec (33.2) 8.3 - -
CASH FLOW FROM FINANCING
Proceeds from issuance of long term debt - 392.4 - -
Proceeds from Sale of Subsidiary Stock, inc Options 29.5 9.5 - -
Principal payments on long term obligations - - - -
Effect of FX on Cash & Equivalents 21.5 (48.5) - -
Net Increase in Cash & Equivalents (235.9) (239.4) 334.3 377.6
Cash & Equivalents at Beginning of Period 853.3 617.4 378.0 712.3
Cash & Equivalents at End of Period 617.4 378.0 712.3 1,089.9
Source: Company reports and J.P Morgan estimates
Trang 8Google, Overweight, ($303.11) Although we think Google’s growth will be afflicted in the near term by the current recession, we believe the company is strengthening its long-term strategic position through market share gains, increased search spend penetration of total advertising budgets, and greater cost efficiency At 14.3x our F’09 GAAP EPS estimate of
$18.36, we find Google’s valuation attractive and are introducing a $430 December
2009 price target As such, we maintain our Overweight rating
• Market share gains are likely to continue We think advertisers will simplify
their ad spend and move toward better performing platforms As such, we expect Google to continue to take market share from search competitors Additionally,
we see Google likely to increase coverage to meet advertiser demand We think coverage will increase 110 bps in 2009 and O&O revenue will increase 13% Y/Y
• Google will likely benefit from increased search spend penetration
According to Nielsen research, even though people spend 29% of their time on the Internet, this medium only has an 8% market share of total advertiser spend Thus, we think advertisers will shift ad spend toward search to better align audience usage and to use the performance-based advertising platform
• Google is striving to achieve a more efficient cost structure In the first 3
quarters of 2008, we estimate that Google grew its operating expenses 40% Y/Y, roughly in-line with net revenue growth of 41% In 2009, we think Google will
be controlling its costs much more carefully, specifically in the areas of contract
employees and non-core product development
• 2009 drivers In our view, the following factors will drive GOOG shares in
2009: (1) improved cost efficiencies, (2) search outperformance relative to other advertising media, and (3) increased monetization and coverage enhancements
• Lowering our 4Q’08 estimates Due to the greater-than-expected economic
deterioration, we are lowering our 4Q estimates We are now looking for 4Q revenue, EBITDA, and pro forma EPS of $4.05B, $2.33B, and $4.83 vs our prior estimates of $4.39B, $2.49B, and $5.22, respectively Although we think there may be upside to our estimates, we are being most conservative in our 4Q outlook We are looking for 1% sequential growth in O&O properties but think network properties may underperform and are modeling (20)% Q/Q growth
Our current and newly introduced 2010 estimates are in the table below:
Table 119: Google Financial Snapshot
$ in millions, except per share data
J.P Morgan
Revenue 4,049.2 15,688.9 17,596.5 21,762.2 34.6% 12.2% 23.7%
EBITDA 2,327.6 9,142.4 10,209.7 12,277.8 32.1% 11.7% 20.3%
Pro Forma EPS 4.83 19.23 21.16 25.26 23.3% 10.1% 19.3%
Consensus
Revenue 4,237.9 15,888.8 19,000.0 22,218.2 36.3% 19.6% 16.9%
Trang 9Our Estimates and Outlook for 2009
We are lowering our 2009 net revenue, EBITDA, and pro forma EPS estimates to
$17.602B, $10.21B, and $21.16 from our prior estimates of $19.52B, $11.12B, and
$23.36, respectively Our new estimates call for Y/Y revenue, EBITDA, and EPS growth of 12%, 12%, and 10%, respectively
In 2009, we are expecting Google to continue to make progress on the international front, both through search volume growth and increasing advertiser demand However, we expect this to be offset by weaker advertiser spend due to the economy and unfavorable foreign currency exchange rates We are modeling international gross revenue growth of 5% Y/Y to $11.1B in 2009 Because of the foreign currency exchange rate headwinds, this is the first year that we expect international revenues
to decline to 50.9% of total revenue from 51.2% in 2008
Beyond international, we believe Google will generate above-average market share growth through continued volume share gains from its domestic competitors We continue to believe Google has the strongest brand in search Google’s rapid innovation of new web offerings should lead to increased attention from consumers, which should contribute to sustained volume share growth in 2009 We think paid clicks will grow 10% Y/Y as search volume increases and as Google continues to take market share
Although we think Google's attempts to diversify revenue are going to be successful
in the long term, we think advertisers will shy away from more experimental advertising forms in the current economic environment Hence, we do not expect a meaningful return on video and mobile investments in the near term
Our Estimates and Outlook for 2010
We are introducing 2010 estimates, which call for Y/Y revenue, EBITDA, and pro forma EPS growth of 24%, 20%, and 19%, respectively Specifically, our F’10 revenue, EBITDA, and pro forma EPS estimates are $21.8B, $12.3B, and $25.26, respectively
In 2010, we are expecting the economic recession to subside and foreign currency exchange rates to be flat Thus, we are expecting search revenue growth to accelerate We are modeling Google.com search volumes to grow ~21% in 2010
We believe international search revenues will make up 53% of total company revenues in 2010
We Are Introducing a Price Target of $430
In introducing price targets for our coverage, we have derived multiples based on 5-year forward EBIT CAGRs We believe the historical record does not provide a meaningful guide to valuation as (a) the majority of the companies in our coverage did not have a track record as public companies through the previous recession and (b) even the public companies were still in their early-growth (and, for some, rapid growth) stage during the last economic downturn
As such, given our projection for Google of a ~17% F’09 - F’14 EBIT CAGR, and
Trang 10better forward visibility than the current valuation of 12x our F’09 estimate) and thus arrive at our December 2009 price target of $430
The parameters of our EV/EBIT multiple analysis are in the table below:
Table 120: Growth Outlook
$ in millions
2009E 2010E 2011E 2012E 2013E 2014E Revenues 17,596.5 21,762.2 25,461.8 29,281.1 33,380.4 37,719.9
Less: Operating Expenses 10,311.8 12,844.4 14,971.5 17,129.4 19,360.7 21,877.5
Operating Income (Loss) 7,284.7 8,917.8 10,490.3 12,151.7 14,019.8 15,842.4
Source: Company reports and J.P Morgan estimates
Table 121: EV/EBIT Multiple Analysis
$ in millions
5 yr forward EBIT CAGR 17%
Implied Enterprise Value 123,839.5
Source: Company reports and J.P Morgan estimates
Valuation and Rating Analysis
We believe GOOG shares are fundamentally attractive due to secular industry growth trends, improving fundamentals in the international market, and expansion of new product categories such as contextual ad and local search Google remains an Overweight pick Google trades at 14x its F’09 EPS vs its large-cap Internet peers at 26x Given Google’s higher growth rate, we think it deserves a premium Hence, our OW rating
Risks to Our Rating
Google has experienced very fast revenue growth over the past few years Our Overweight rating is based on the assumption that Google will continue to be the market leader in the paid search space and will continue to enjoy strong revenue growth If the content publishers like Yahoo! and Microsoft are able to gain market share through user defection from Google’s user base, then our rating could be too optimistic However, we have not seen any trends that would support this argument thus far
Our Overweight rating is also predicated on the company’s success in the