Key Takeaways:
· Solid 4Q results: they beat on revenues and EPS.
· Weak guidance because of Coronavirus impact: they are now projecting Q1 revenue down 3% to 7%, the street had been expecting 5% growth. And they expect 1Q room nights booked to be down 5% to 10% and gross bookings down8%-13%. This implies room nights in March down 25-35%, so results are meaningfully deteriorating with the recent cases of the virus in Italy. If the virus spreads more broadly across Europe, the impact to their results will get much worse. APAC is 20% of room nights, with no single country more than mid-single-digits. ADRs are lower in APAC, so share of gross bookings is less than that.
· Underlying operations performing well: before the virus outbreak, January was trending above expectations. They are progressing on growing their alternative accommodations business and their connected trip strategy.
Current Price: $1,694 Price Target: $2,400
Position Size: 2.5% TTM Performance: -1%
Highlights:
· Solid gross bookings: Room nights grew 12%, ADRs were down 4%, putting constant currency gross booking growth at ~7%.
o Q4 room nights were 191 million, up 12% YoY. Exceeded high end of guidance range.
o Full year 2019 room nights were 845 million, up 11% YoY.
· Alternative accommodations: $3.1B in revenue – now at 21% of overall revenue for the full year. Grew 14% at a “healthy profit margin.” Now has 6.3 million listings.
· Payment product – requires additional investment but will help them control and opportunistically change room prices which they believe will improve their room night share. Payment platform will also aid their connected trip strategy.
· Connected trip strategy gaining traction:
o their strategy is to build a multi-product offering of accommodations, flight, attractions, ground transport and dining – all connected by a seamless payment network.
o Launching flight product more broadly. Should be available to ~50% of customers by the end of 2020. Launching air product should help with gaining share in the US market as air/hotel bookings tend to be more bundled in the US. Expedia dominates the US market, while Booking dominates Europe.
o They saw a lift in rentalcars.com (+12% YoY) as they leveraged integration of this with Booking.com.
o They intend to grow this strategy with owned properties, such as Opentable, and by partnering with 3rd parties.
· Cost cutting – Mgmt. commented on the call that they will focus in 2020 on looking for opportunities to reduce their cost structure. This is new and not something they’ve discussed before. This comes after EXPE has announced meaningful cuts, including major layoffs.
· Improving ad spend efficiencies. Saw solid top line growth while reducing reliance on performance marketing. Performance marketing expense only grew by 2%, driving 40bps of op leverage in the quarter. Brand marketing was down by 31%, adding 130bps of leverage. Going forward, they will no longer break out performance and brand marketing. They will report them combined.
Valuation:
· Repurchased >$8billion of stock in 2019.
· Strong balance sheet with no net debt.
· The stock is still undervalued – trading at >5.5% FCF yield on 2020.
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
www.crestwoodadvisors.com
