April 11, 2016

Adjusted Valuations Provide New Insight Into Expedia


Summary

  • Using Adjusted Earnings, Expedia’s Adjusted Return on Assets was 17% in 2015 – significantly higher than the traditional 2% ROA most financial databases report.
  • This difference is primarily caused by EXPE’s $10.8bn goodwill, which leads to a significant distortion of the firm’s economic reality under GAAP.
  • Also of note is the difference between the firm’s Forward Adjusted Value-to-Earnings ratio of 14.6x versus a traditional forward P/E of 20.5x.

EXPE - 2016 04 01

Performance and Valuation Prime Chart

Under GAAP, as-reported financial statements and financial ratios of EXPE do not reflect economic reality. The traditional return on assets computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of EXPE were primarily driven by the inclusion of the firm’s immense goodwill ($10.8bn) and other intangibles ($3.3bn), which inflate the firm’s asset base, and by incorrectly expensing R&D ($830mn) and operating leases ($109mn) rather than treating them as part of the company’s investments.

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates EXPE’s Adjusted Return on Assets as 17% in 2015. In contrast, most financial databases show a traditional ROA of only 2%, far below the cost of capital. Meanwhile, the firm’s Forward Adjusted Value-to-Earnings ratio is 14.6x, at the middle of historical valuations, while the firm’s traditional forward P/E is at 20.5x. The profitability of EXPE’s operations and their equity’s true value are therefore not what traditional metrics originally suggest.


Click here to read the article in its entirety at Seeking Alpha.