Learn From One of 2012's Best Special Situations

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

During the closing weeks of 2011, Expedia's (NASDAQ: EXPE) much-anticipated spin-off of TripAdvisor (NASDAQ: TRIP) became official. Expedia decided to spin off its travel-review and social media division after determining that its own future lay with its core online travel agency. During the second half of 2011, the deal was heralded as a potential value-creator and was watched closely by retail investors and financial advisors alike. In the 13 months since the deal's closing, both companies that it produced have outperformed the broader market.

About Expedia and TripAdvisor
Bellevue, Washington-based Expedia is an all-purpose online travel agency that provides booking services for flights, hotels, rental cars, cruises and other travel-related activities. With the notable exception of Southwest Airlines, it works with virtually every major travel company. This slight is not unique to Expedia: Budget-conscious Southwest has long refused to work with other third-party booking agencies. The Dallas-based airline offers special deals on flights through its proprietary website.

Expedia's success is partially the result of its tremendously diverse brand portfolio: The company operates region-specific and international travel brands like Hotels.com, Hotwire.com, Classic Vacations, Expedia Cruise Ship Centers and others. The company employs about 10,000 people and markets its brands on an international basis.

Until the spin-off, Newton, Massachusetts-based TripAdvisor was Expedia's most profitable and best-known division. The company uses crowd-sourced and professional reviews to aggregate information about a wide range of travel-related companies, packages and experiences. It also offers international property and time-share listings. In the United States, it operates TripAdvisor.com. In the three dozen international markets for which it provides its services, it operates country-specific and language-specific websites that are geared towards its local client base. Recently, it has made a foray into the travel-booking space with its SniqueAway "flash deals" service.

How the Deal Happened
The terms of the spin-off were relatively straightforward. Shareholders of record on December 20, 2011 were given one share of TripAdvisor and one share of Expedia for every two Expedia shares that they owned. In essence, Expedia shareholders saw half of their Expedia shares converted into TripAdvisor shares. TripAdvisor began trading on December 21, 2011. The deal was deemed to be tax-free by U.S. regulators.

At the time of the spin-off, Expedia was trading near $57 per share. After losing half of its value as a natural product of the spin-off, the company traded in a range between $28 and $35 per share for several months. Meanwhile, TripAdvisor began trading at $29 per share.

Looking Back: Solid Returns
At first, the deal looked as if it would be a disaster. During its first day of trading, TripAdvisor fell by nearly 10 percent. However, the company was trading near $35 per share on a consistent basis by the end of the first quarter of 2012. After a better-than-expected earnings report, its share price spiked above $40 and hit a high of $46.36 in early July. TripAdvisor investors who sold their shares at this point would have realized a 60 percent return in just over six months.

After a lackluster earnings report, the company's shares came back down to Earth and spent most of the remainder of 2012 in a downward trend. In fact, TripAdvisor briefly traded below $30 per share in early November. Fortunately, a solid earnings report, a series of upbeat economic and travel-sector reports, and a general uptrend in the market combined to boost its share price by nearly 50 percent during the final two months of 2012. TripAdvisor now trades in a narrow range between $42 and $45 per share. Investors who sell their shares at these levels would realize a one-year return of between 45 and 55 percent. For reference, the S&P 500 index gained about 20 percent during the same time frame.

Expedia's performance has been impressive as well. From its early-2012 lows, the company's shares have more than doubled in value. Expedia currently trades in a narrow range between $62 and $64 per share. This represents a one-year return of approximately 125 percent. As with TripAdvisor, solid earnings reports and encouraging news about volumes and subscriptions have combined to boost Expedia.

Looking Ahead
In retrospect, Expedia's success may be even more surprising than TripAdvisor's. Whereas the smaller company has been posting breakneck subscriber and volume growth on its signature travel review site, its former owner has experienced a slowdown in traffic growth on its own flagship service.

However, secular economic trends appear to be working in Expedia's favor: As the economy improves, the market for business and leisure travel looks poised to improve as well. During the past 12 months, the company has posted several solid earnings reports. Although its trailing P/E ratio is a lofty 25, such valuations are the norm for Internet-based companies. Meanwhile, TripAdvisor has continued to meet or exceed expectations and maintains a P/E ratio commensurate with that performance. Like its former parent, it appears that this fast-growing company still has considerable room to run.

In the final estimation, the Expedia-TripAdvisor spin-off must be rated as a solid success. At this moment, investors who cash out their positions in these two stocks would realize average annualized gains in the neighborhood of 55 to 60 percent. Investors who purchased additional tranches of Expedia stock at its early-2012 lows would see even more impressive gains. However, both companies may continue their winning streaks for some time. As the economy continues to improve, the market for practical travel services and advice looks primed to follow.


mthiessen has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines and TripAdvisor. The Motley Fool owns shares of TripAdvisor. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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