Key Takeaways:
· Revenue was better than expected and EPS was worse, however throughout the quarter they saw a phased impact of COVID 19 in their results as it hit different geographies that I think made consensus numbers not that meaningful. In Q1, partial impact of the coronavirus led to significant decrease in bookings. Gross travel bookings decreased 50% and room nights decreased 43%, w/ ADRs down mid-teens. Given their Europe focus, they felt the impact sooner than the US. Newly booked room nights, which exclude the impact of cancellations were down over 60% YoY in March and down over 85% in April.
· In response to the current environment they’ve halted stock buybacks, reduced costs including cutting marketing (their largest expense), had layoffs/furloughs and bolstered their liquidity position.
· No guidance. They expect a significantly larger impact in Q2 relative to Q1.
· CEO Glen Fogel said… “we are seeing some stability in our newly booked room night growth trends. We hope that this is the beginning of the road back to recovery, but it’s certainly too early to say with certainty”…” we believe that domestic travel will rebound sooner than international travel as we expect travelers to look to their home country or region first for safe travel options.”
Highlights:
· Total revenues were down 19% and adj. EPS was $3.77, down 66%.
· Revenue was less negatively impacted than room nights and gross bookings due to the fact that many cancellations were received in Q1 with the check-ins expected to occur in later quarters.
· Preliminary April results: newly booked room nights in April were down over 85% YoY. Reported room nights were negative in April (and March) as cancellations outpaced new bookings. For April, they saw a meaningfully higher domestic mix in their business. Historically, domestic accommodation bookings represent about ~45% of their total business and if Western Europe is considered as one market, the historic mix increases to about 55%. In April, their domestic share increased to ~70% and for Western Europe the domestic mix increased >75%. They also saw a shift to alternative accommodations associated with longer-term bookings. Towards the end of April, they saw some very early indications that domestic travel was starting to return in certain markets where shelter-in-place rules were relaxed, including Greater China, South Korea, Vietnam and Germany. In the US, newly booked room nights declined less than the global average in April and they saw an improvement in domestic travel during – and those trends cannot be tied to a relaxation in shelter-in-place rules as those have only happened in a few states and in recent days. They say it is too early to think we’re witnessing anything like a broad rebound in travel especially as they’ve seen some countries like Singapore, where travel demand was less impacted than other places initially, relapse. They are now seeing significant travel demand decreases associated with new outbreaks.
· Management says their assumption are that it will be likely be years, not quarters, before we witness a full recovery of global travel demand and that they expect travel to fully recover later than many other industries.
· They do benefit from having a highly variable cost structure which they can toggle in periods like this.
· Balance sheet: Q1 ending cash and investment balance was ~$9B. They did spend $1.3B on buybacks early in the quarter, but then halted buybacks once they recognized the growing impact of the pandemic. Subsequent to the end of the quarter they had a debt offering. Including that and a refund of a sizable Dutch tax prepayment, their cash is now at >$14B.
· Valuation: The stock has recovered from trough valuation in March, but still inexpensive relative to 2019 FCF, trading at close to an 8% FCF yield on 2019.
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]
[category earnings]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109