Initiating Expedia: Outperform

We are initiating coverage of Expedia, Inc (EXPE - Analyst Report) with an Outperform rating.

The stock has had a great run since the beginning of the year, with the share price increasing nearly 149%. Most of the increase has come on the heels of the company reporting better than expected results in the March quarter.

This was followed by another stellar quarter, making the company look very good. Its closest competitors Orbitz Worldwide (OWW - Snapshot Report) and Priceline.com (PCLN - Analyst Report) have also fared quite well, indicating a positive outlook for the sector.

As one of the largest online travel companies in the world, Expedia has been impacted by the recession. However, management has come back strongly, with effective promotions that stepped up the conversion rate.

The Summer Sale of 2009 was very big, with 5,000 hotels joining in, compared to 1,800 last year. Participating hotels saw a 40% increase in room nights, according to management.

These statistics continue to help the company woo other suppliers into the network. We are also positive about international initiatives, which we think will be the key to future growth.

Management has taken care of the demand side as well, scrapping booking fees for both hotels and air travel. This was the main reason for the recent increase in volumes. While we cannot discount the fact that it led to declining average daily rates, management appears confident that the higher volumes will more than compensate for these declines.

The possibility of increased occupancy taxes and low growth in Egencia (the smallest segment) seem less significant in comparison to the above-mentioned positives. We rather believe that efficient cost management, a favorable online advertising environment and solid financials will help EXPE deliver strong results going forward.