Expedia Still Looks Attractive

Expedia (EXPE) released earnings yesterday and results were essentially flat year-over-year. The international business continued its stellar growth and actually helped dampen some of the weakness in the domestic business. Hotel revenue was up smartly but air revenue was down significantly. Expedia cites “record industry load factors” as the problem there. What this means is that there is currently high domestic demand for air travel, resulting in fewer unfilled seats. And because of high demand the airlines don’t need companies like Expedia to help them unload hard-to-fill seats, as was the case a few years ago following 9/11. This trend is likely to continue for the foreseeable future, but should be mitigated by higher hotel revenues and continued growth internationally.

During the third quarter, they bought back nearly 5% of outstanding shares at bargain prices. The bulk of this was done in July at average prices of just over $14/share. This makes each slice of the pie bigger for shareholders who hang on. Expedia issued a small amount of debt (which is just 8% of total capital) to accomplish such a large buyback in a single period, but I think this was done opportunistically because management saw the shares as cheap. Look for more of this in the future, as an additional 20 million-share repurchase has been authorized. Barry Diller has a controlling (55%) interest in the business so you can bet he’s got shareholder’s interests in mind.

On the surface, Expedia does not look cheap, trading at nearly 17 times next year’s consensus earnings estimates. Yet reported earnings sometimes do not tell the whole story. I see the company as a cash machine that is being run for the long-term benefit of shareholders. The company’s free cash flow yield (free cash flow per share divided by the share price) is over 16%. This is the same as saying that Expedia trades for about 6 times free cash flow per share. The company also holds $946 million, or 17% of its market value, in cash on the balance sheet. A private owner looks at the cash the business generates, not the “earnings” the company reports. To a private buyer, these would be attractive figures especially given the growth opportunities that lie ahead.

Disclosure: I own shares for clients as well as personally.

Biovail's Has a Strong 3Q - Can It Last?

Biovail (BVF) is up over 5% in pre-market, as the third quarter results came in better than expected. The company also raised its guidance for 2006 – EPS in a range of $2.50-2.60 and cash flow from operations of nearly $3.00 per share. Even at pre-market prices, this represents forward P/E ratio of under 7. And almost 25% of its market value is in cash. If you strip out this cash, the stock is trading at slightly over 4 times operating cash flow. Undoubtedly, if the numbers can hold up, this is a bargain. But management qualified these estimates by saying that the number assumes that they get no new generic competition and that their existing products continue on their present track.

That, as I’ve written about before, is the key question. For the first nine months, Wellbutrin XL revenues were up almost 40% and accounted for 72% of the company's year-over-year product revenue growth. In all likelihood, this key product, which holds a nearly 60% share of new prescriptions in its market and represents 41% of the company's product revenues, will have generic competition come on line that could seriously impair this position going forward. If not later this year, early next year seems increasingly likely. The conservative investor would factor a precipitate drop in Wellbutrin XL revenues into future cash flow and EPS calculations. How much is unclear, but when generic competition came online for Wellbutrin SR in Canada, prescription volume dropped 32%.

The Oil Industry's Cautious Investing

According to a new study by the International Energy Agency and mentioned in the Wall Street Journal today, the world oil industry has “barely increased” investments in oil and natural gas production during the past five years after accounting for cost inflation. That is, just 5% between 2000 and 2005. Well, that’s all fine and dandy, but these companies do have to account for cost inflation because they are the ones who have to pay these increased costs. And these are up 70% between 2000 and 2005. So from the companies' perspective, they are making increased investments in oil and gas production. And this report also doesn’t seem to be considering efficiency gains resulting from new technologies these companies are using – it simply takes the investment dollar figure and adjusts it for industry cost inflation.

What worries me is that this report could provide Democrats with added leverage in getting some sort of “windfall profits tax” out of these companies. That would be just what we need – more government involvement in private business (yes, this is sarcasm). Where was the government a few years ago when some of these companies were barely making their interest payments? Will they return these windfall profits back to the energy companies when (if) prices decline? It seems like the memories of our legislators are entirely too short. In the past, the oil and gas industry has been one of boom and bust cycles. Now that industry executives have wised up and are wading somewhat cautiously into new investments while prices are high, they may get punished by the government in the form of higher taxes. My advice to those who want a windfall profits tax? Leave the market be and go read up on basic economics.