Expedia (EXPE) and Priceline (PCLN), both major online travel agencies, have developed a duopoly in the online travel market with their aggressive expansion strategy. For example, both EXPE and PCLN have shown interest in China’s Ctrip.com (CTRP), with PCLN recently increasing its stake. PCLN’s TripAdvisor (TRIP) Instant Booking platform partnership is another way to outpace EXPE.
Expedia’s strong cash flows have certainly helped fund many of these acquisitions, but debt has also played a pivotal role. Total debt on EXPE’s balance sheet has increased from $1,249 million in 2013 to $1,746 million in 2014 and $2,475 million at the end of 3Q15. As a result, EXPE’s leverage ratios have also increased. Total debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio has increased from 1.6x in 2013 to 1.84x in 2014 and 2.51x at the end of 3Q15.
In 3Q15, EXPE has gone from being net debt negative to net debt positive. that means that its debt is now higher than cash on its balance sheet. Net debt-to-EBITDA ratio has increased from -0.12x in 2013 to -0.01x in 2014 and 1.0x in 3Q15.
As of the end of 3Q15, EXPE’s cash on the balance sheet was $1,491 million. EXPE has also generated $1,541 million from cash flow from operations in the first nine months of 2015.
EXPE forms ~1.4% of the Guggenheim S&P 500 Pure Growth ETF (RPG).
Why is increasing leverage risky?
Both EXPE and PCLN show no signs of stopping their aggressive expansion spree. Currently, EXPE’s debt is at manageable levels, but this is bound to increase as the competition gets tougher.
Also, the US dollar is expected to stay strong for some time given the deteriorating global conditions, which will dampen EXPE’s growth.
High leverage and interest costs reduce EXPE’s ability to cope with unfavorable conditions. Investors should thus pay close attention to EXPE’s increasing leverage.