It Might Be Best To Wait On The Sidelines Before Online Travel Earnings: Morgan Stanley

In a report published Thursday, Morgan Stanley analyst Brian Nowak said that the online travel industry's unit economics and incremental margins were likely to continue to be under pressure for the rest of this year. Analyst Brian Nowak maintained Equal-weight ratings on both

and

, with price targets of $1,300 and $100, respectively. Nowak expects Priceline's incremental margins to contract 1,800bp to 24 percent in 2015, whole expecting Expedia's to decline by 100bp to 14 percent. "This is driven by continued increases in ad spending per room night (in particular for PCLN) and lower gross profit per room night for EXPE," the analyst explained. Nowak cautioned, however, that both the companies were being given "the benefit of the doubt" that industry economics would improve next year and incremental ad spending would decelerate. Moreover, there is downside risk to Expedia in case the

deal is not approved by the US Department of Justice. "In the absence of faster growth or larger revisions (likely from materially improving industry economics), we remain on the sidelines for both EXPE and PCLN," the Morgan Stanley report said. For Expedia, the EBITDA estimates for 2015 and 2016 have been raised by 8 percent and 9 percent, respectively, to reflect the sale of the company's 62.4 percent stake in eLong. For Priceline, the EBITDA estimates have been raised by around 1 percent to reflect lower costs in 2015 and on account of currency impact in 2016.