Is Expedia Better Than Priceline?

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For the last decade, Priceline (NASDAQ: PCLN) has been the clear winner in the online travel industry. However, after Expedia (NASDAQ: EXPE) reached new highs last Friday following earnings some are wondering if the tide is changing.

Last Friday Expedia destroyed the expectations of analysts, despite profit falling 18%. The company’s sales grew 18% led by a 20% gain in the company’s largest contributor, world-wide hotel revenue.  These numbers suggest that Expedia’s business continues to grow despite increased competition, and the 19% increase in booking suggests even further growth in the final two months of 2012.

As I said, Priceline has always been the clear winner as an investment. But with Priceline trading with a 20% loss over the last six months and Expedia trading at all-time highs perhaps investors are shifting from PCLN to EXPE.

When you look at the metrics of both Expedia and Priceline it appears that both are near even. Below I have included a chart with a few of the “homepage metrics,” which are the metrics that are most followed by retail investors.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p>Priceline</p> </td> <td> <p>Expedia</p> </td> </tr> <tr> <td> <p>Market Cap (billions)</p> </td> <td> <p>$28.87</p> </td> <td> <p>$8.00</p> </td> </tr> <tr> <td> <p>Trailing P/E</p> </td> <td> <p>24.17</p> </td> <td> <p>23.84</p> </td> </tr> <tr> <td> <p>Forward P/E</p> </td> <td> <p>15.96</p> </td> <td> <p>16.36</p> </td> </tr> <tr> <td> <p>Price/sales</p> </td> <td> <p>5.78</p> </td> <td> <p>1.81</p> </td> </tr> <tr> <td> <p>Profit Margin</p> </td> <td> <p>25.58%</p> </td> <td> <p>8.95%</p> </td> </tr> <tr> <td> <p>Return on Assets</p> </td> <td> <p>23.08%</p> </td> <td> <p>4.36%</p> </td> </tr> <tr> <td> <p>Return Equity</p> </td> <td> <p>48.41%</p> </td> <td> <p>12.93%</p> </td> </tr> <tr> <td> <p>Total Cash (billions)</p> </td> <td> <p>$3.94</p> </td> <td> <p>$2.36</p> </td> </tr> <tr> <td> <p>Operating Cash Flow (billions)</p> </td> <td> <p>$1.46</p> </td> <td> <p>$1.27</p> </td> </tr> <tr> <td> <p> </p> </td> <td> <p> </p> </td> <td> <p> </p> </td> </tr> </tbody> </table>

All information obtained from Yahoo! Finance

The first statistic that jumps out to me is Priceline’s incredible advantage in profit margin and returns on both equity and assets. These are both metrics of efficiency on behalf of management, and clearly Priceline has been the better company in terms of efficiency.

Seeing as how Priceline has such strong margins and returns on its assets/equity you must wonder how much room exists for upside. Expedia and Priceline have very similar operations, therefore I believe Expedia has more room to improve its margins and returns on equity/assets meanwhile Priceline is most likely near the max.

The big question for Expedia is how the company can reflect the margins of Priceline, or even improve its margins? Priceline has executed to perfection on all of its investments, expenditures, and emerging market penetration. Expedia operates with several businesses, and it might suit the company to downsize its less profitable businesses.

The company must continue to build on its current platform, rather than spending money to add new platforms, which ultimately cost money and impacts margins. Expedia has seen some problems in revenue per room night and returns on rates, however Priceline continues to excel in these areas. Therefore, improving margins for Expedia is possible, it's simply a matter of execution, and efficient low-cost marketing that gives the company an edge. 

Both companies have strong balance sheets with minimum debt and strong cash flow from operations. However, in terms of valuation, Priceline is much more expensive. The company has a price/sales of more than three times that of Expedia, meanwhile both trade at a similar ratio compared to earnings.

The reason Priceline trades at such a large premium compared to sales is because its margins are so great. For this reason I actually prefer Expedia, as I believe there is more room for improvement. Priceline is expected to see slightly better income growth, but then again, it is priced accordingly so that it should see greater profit growth.

The number one mistake that some investors might make is looking at the performance of the stock and determining that Priceline is the far better value. The truth is that both companies are of similar valuation, but because of higher costs and Expedia having lower margins, it appears to be a better long-term play while Priceline has room to fall. Therefore, at 52-week highs, Expedia looks to be the better long-term investment if you are considering an investment in this space. 


BrianNichols has no positions in the stocks mentioned above. The Motley Fool owns shares of Priceline.com. Motley Fool newsletter services recommend Priceline.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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