Expedia (EXPE) went on an aggressive expansion spree in 2015. Expedia spent more than $6 billion on the completion of its four strategic acquisitions: HomeAway, Travelocity, Orbitz Worldwide, and a majority stake in its joint venture with AirAsia. Many of these acquisitions have been financed with leverage.
As a result, total debt on Expedia’s balance sheet has increased from ~$1.8 billion at the end of 2014 to $3.2 billion at the end of 2015. As a result, EXPE’s leverage ratios have also increased. Its total debt-to-EBITDA ratio has increased from ~2.0x at the end of 1Q15 to ~3.5x at the end of 1Q16.
Since 3Q15, Expedia has gone from being net debt negative to net debt positive, meaning that debt is now higher than cash on its balance sheet. Its net debt-to-EBITDA ratio has increased from -0.6x at the end of 1Q15 to 1.2x at the end of 1Q16.
Expedia’s rival Priceline has been increasing its debt and had a net debt-to-EBITDA ratio of 0.99x at the end of 4Q15, TripAdvisor’s (TRIP) ratio was about -1.5x, and Ctrip.com’s (CTRP) ratio was ~5.2x.
Cash flow provides cushion
Strong cash flows have certainly helped fund many of these acquisitions and should continue to support Expedia’s balance sheet in the future.
As of the end of 1Q16, Expedia’s cash on its balance sheet was ~$2 billion. EXPE has also generated $1.1 billion from cash flow from operations in 1Q16 and free cash flow of $932 million.
Why is increasing leverage risky?
Both Expedia (EXPE) and PCLN show no signs of stopping their aggressive expansion spree. EXPE’s debt is currently at manageable levels, however, this is bound to increase as the competition gets tougher.
High leverage and interest costs reduce the company’s ability to cope with unfavorable conditions, which increases its risk. Investors should pay close attention to Expedia’s increasing leverage.
EXPE makes up 2.8% of the First Trust Dow Jones Internet Index ETF (FDN).