Expedia's Challenges May Worsen In 2018, Analyst Says

Analysts at MKM Partners see "cyclical and structural uncertainties" for the entire online travel agency group, with many of these woes specific to the U.S. market, which would prove to be a greater headwind for companies with outsized exposure to the domestic market — such as Expedia Inc EXPE.

The Analyst

MKM Partners' Rob Sanderson downgraded Expedia's stock rating from Buy to Neutral with a fair value estimate slashed from $170 to $115.

The Thesis

Expedia's third quarter earnings report and firsthand data checks across the travel industry led the analyst to be concerned about three notable "cyclical factors" over the next few quarters, he said. (See Sanderson's track record here.)

While each headwind alone is smaller when grouped together, it is notable enough to justify a downgrade, Sanderson said.

The first factor consists of Expedia's hotel occupancy rate in the U.S. standing at record highs, yet room night growth has "fallen short for Expedia," the analyst said. U.S. hotel room night growth likely slowed from 9 percent year-to-date to 7 percent in the third quarter, according to MKM. 

The second factor is related to supply tightness, Sanderson said: a supply tightness is "crowding out OTA customers" and prompting them to seek out alternative accommodations at a faster pace.

Third, a more challenging environment for the business travel segment in 2018 comes at a time when modification of last room availability rights at large hotel chains could "accentuate this to a degree," Sanderson said. 

"While the stock is not expensive at 10x consensus EBITDA, we do not expect a recovery until clarity on multiple fronts is established."

Price Action

Shares of Expedia were trading lower by 0.58 percent at $118.48 at the time of publication.

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