Moody’s is materially overstating the credit risk of Expedia, Inc. (NASDAQ:EXPE) with its cross-over Ba1 rating. Our fundamental analysis highlights a much safer credit profile for EXPE, whose strong cash flows cover all their obligations including debt maturities through 2022. Moreover, their sizable expected cash build would allow them to service all obligations including debt maturities if their cash flows ever fall short. We therefore rate EXPE six notches higher at an IG3+ credit rating, or an A1 equivalent using Moody’s ratings scale.
Cash bond markets are also overstating credit risk with a cash bond YTW of 4.342% relative to an Intrinsic YTW of 3.092%, while CDS markets are accurately stating EXPE’s credit risk with a CDS of 100bps relative to an Intrinsic CDS of 124bps.
EXPE is trading at the low end of historical valuations with a V/E’ of 13.9x. The market is expecting robust Asset’ growth of 17% going forward, with ROA’ materially falling to historically low levels from to 12%. Considering consensus estimates for ROA’ to return to recent historical highs, market expectations appear too bearish. As a result, even if the firm experiences fading ROA’ levels, equity downside is limited. That said, there is a possibility for modest equity upside given low valuations and steady profitability levels.
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