Current Price: $1,916 Price Target: $2,400
Position Size: 2.5% TTM Performance: -4.7%
Key Takeaways:
· Gross bookings growth was $25B up 5% YoY and up 10% constant currency. Guidance was for 4-6% growth constant currency.
· They booked 213 million room nights in 2Q, a 12% increase (6-8% guided).
· ADR’s down 1.5% a little better than the -2% last quarter. Geographic mix and stronger dollar negatively impacting ADR’s. Countries with lower ADR’s growing faster and European travelers to the US trading down b/c of stronger dollar.
· Revenues were $3.85B, up 9% (14% constant currency), better than the $3.75B expected.
· Bookings guidance for Q3 (peak travel season) was lower than expected, but they have a long history of guiding conservatively (chart below). Guidance for Q3 is +3-5% gross bookings growth constant currency, suggesting a deceleration from this quarter (partly driven by tougher compares). Despite this, management noted a “solid start to the summer travel season”
· Increased ad spend this quarter (+8%) aided higher bookings growth. They’ve been trying to “optimize” ad spend for several quarters which has been resulting in weaker bookings growth…clearly this ad spend/rev growth algorithm will continue to be a focus going forward as the trade-off between growth and spend persists.
· On the call they said “short-term return on our brand spending is running below our expectations. As a result, we plan on refining our spending levels on brand marketing in the second half of the year.”
· Investing for growth: focus on “connected trip” and payment platform that supports non-hotel properties. Investments will reduce their full year EBITDA growth by a few percentage points. Connected trip vision encompasses all of their brands w/ a goal of broadening focus from accommodations to other aspects of travel spend. They’ve been talking about this for a while, but focus here seems to be ramping with more emphasis on leveraging assets like Opentable.
· Alternative accommodations: this is their business that competes with Airbnb and HomeAway. This is growing faster than their overall business. They declined to give any details on the state of this business when asked.
· French digital services tax will have $32m full year impact.
Valuation:
· Repurchased $2.6 billion of stock in Q2 – $14.2 billion outstanding under repurchase authorization – expect to complete this authorization in the next 2-3 years assuming stable business and market conditions.
· Ended the quarter with $11.4 billion of cash and $8.7 billion of debt.
· The stock is still undervalued – they should produce over $5B in FCF this year, putting them at close to a 6% FCF yield.
Thesis:
1. Booking is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.
2. BKNG has several competitive advantages relative to Online Travel Agent (OTA) peers:
· Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings
· They operate largely on an agency basis which allows them to continue to grow their network and do so profitably
· Strong position in China/South East Asia via Ctrip and Agoda
3. Booking’s addressable market is growing driven by: 1.) Alternative accommodations 2.)
Increased penetration (growth of mobile/internet) 3.) Global growth of travel spend > GDP.
4. Their asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.
$BKNG.US
[tag BKNG]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109