A Low-Risk Way To Play The Rebound In Travel: Booking Holdings
The owner of Priceline.com and Booking.com among other websites, Booking Holdings (BKNG) is the leading third-party online travel marketing and reservation website measured by profitability and company size. William Shatner was its spokesman for years. So, if Captain Kirk from Star Trek believed in its service, of course the company’s fortunes took flight.
Image Source: Priceline Website
I don’t like airline companies right now, running at 25% of capacity vs. 2019 levels. Cruise lines still aren’t sailing on most of the globe. Hotel businesses have seen a collapse in revenue. However, plenty of bullish investor trading activity in the stock of Booking Holdings has caught my attention in June-July.
Image Source: Booking Website
In the travel sector of the stock market, Booking has been one of the top performers for years. It has survived especially well during the coronavirus pandemic because of its high-margin, online business model. Since it is effectively a middleman between consumers/businesses and airlines, vacation cruises, resorts, hotels plus other destination sellers, very little capital investment is required. The company has successfully ridden growth in internet use and technology the last two decades, a trend moving marketing and reservations from your local physical travel agency to the ease of online research and decision making.
Superior Investment Performance
Below is a chart of the price returns you could have achieved investing $10,000 in a variety of the largest travel-related businesses. I am picturing third-party service competitors and peers Expedia (EXPE) and Trip.com (TCOM), plus hotel providers Marriott (MAR), Hilton (HLT), Hyatt (H), InterContinental (IHG), the major U.S. airlines of Southwest (LUV), United (UAL), Delta (DAL) and Carnival Cruises (CCL). While this is not a complete list of peers, it gives a good cross-section of investment returns from a variety of travel companies. I am drawing comparisons between one month and five years. Notice Booking Holdings is at or near the top of the graphs for equity performance.
Strong Operating Returns/Margins
The reason for Booking’s outperformance hinges on its low capital investment, low fixed-cost structure. The company operates on ultra-high gross margins above 90%, with earnings and cash flow margins that remain relatively stable as demand for reservation services fluctuates.
Below is a 10-year chart of net after-tax profit margins, the return on total assets, and cash flow to assets employed. During the last nine years, before the coronavirus showed up, Booking’s final profit margin on each dollar of sales has routinely been in the 20-30% range. In comparison, many blue-chip businesses considered high-margin winners on Wall Street have rates in the 10-15% range.
Booking’s return on assets is quite high and sustainable under normal economic circumstances. Below you can review a decade-long graph of this data point vs. peers and competitors in the travel marketplace. Running at nearly double the return on asset rate of the general travel industry, trailing 2019-20 results (before the brunt of pandemic losses is felt) highlight how valuable the business model and execution by management has been.
Fundamental Valuation Analysis
You would think Booking Holdings’ higher-margin business holding up much better than the travel industry overall would be valued at premium multiples like the rest of big tech in July 2020. However, with the total devastation of the travel sector in the short run from the pandemic shelter-in-place orders and a slow reopening process ahead, Wall Street is leaning toward a more conservative pricing of the business. On one hand, Booking is at a 10-year low on “trailing” results of earnings, sales, cash flow and free cash flow, drawn below.
On the other hand, earnings are expected to be near breakeven at $13.90 per share for calendar/fiscal 2020. The economic recession and consumer preference to avoid travel for the time being have greatly depressed vacation and travel reservation activity. Earnings projections are currently expected to bottom in Q2, pictured below. As the stock market looks forward at least 3-6 months, the stock rebound since March-April makes perfect sense.
Image Source: Seeking Alpha Earnings Page
And, if Wall Street analyst estimates for a rebound in travel activity in 2021 prove correct, today’s $1,707 share price may even be on the cheap side. $69.89 in forecasted EPS equates with a P/E of 24x forward results, dramatically lower than its 10-year average or the equivalent setup for big tech in the 30-40x range basis 2021 earnings estimates. In the end, if you believe travel and vacation interest will recover in a few years back to 2019 levels, Booking Holdings could be an intelligent bargain for long-term investors.
Lastly, I want to mention the company’s balance sheet. It is strong, liquid, flexible and conservative. At the end of March, Booking held $7 billion in cash and $9.3 in total current assets vs. $14 billion in total liabilities ($8.5 in debt). Again, using trailing 12-month results of $4.3 billion in cash flow, the operating business could be all but liability free in one year and three months under a normal travel backdrop (after subtracting current assets from total liabilities). Measured next to the average S&P 500 business trading at greater than 5x net long-term liabilities to cash flow, Booking Holdings retains a super-strong accounting setup for owners.
Booking’s cash holdings represent six months of trailing revenues, and a full year of projected 2020 revenue production (50% lower than 2019). I cannot name another travel-related business that has enough cash on hand to theoretically close its doors for a year and still be able to pay its bills and reopen later; no harm no foul!
Positive Technical Momentum Developments
Worried about the resurgence in virus cases since May, I have not had much interest in researching Booking Holdings until recently. The reason is found in a much-improved picture of technical trading momentum. Using the indicators and tools I like to watch, over the last month of trading, Booking Holdings holds a top 10 short-term technical score out of the S&P 100 large capitalization index.
Below I have drawn two-month and one-year charts of Booking’s daily price and volume action. Underneath volume, I have picked several indicators to illustrate/explain my newfound bullishness. The Negative Volume Index (NVI) has been performing much better of late, marked with a red arrow. Since early June, the stock has been able to rise rapidly on low trading volume four separate days, and drifted higher many other weak volume days. This indicator changeover from months ago is hinting overhead supply may not be the same as earlier in the year. Second, On Balance Volume seems to be resuming a steady and healthy uptrend. Higher volume up days are becoming more common for the first time since the coronavirus pandemic began, marked with a blue arrow.
Another data point for review is the action of the 14-day Average Directional Index (ADX). Below you can see the last three instances of readings below 15 have been solid areas for short-term purchase of the stock. Marked with green circles, the lack of trend direction in this indicator has been resolved to the upside, more often than not. For reference, the late March reading near 50 proved a successful oversold signal.
The quality of the Booking Holdings business model is coming into clear focus during the 2020 COVID-19 travel industry wipeout. Against record operating losses for nearly every company in the travel/vacation business, Booking is still projected to earn a profit. For long-term investors, the decision to purchase shares or not is less of a binary choice dependent on a quick economic recovery later in the year.
The global economy is slowly reopening for regular business, as mask wearing and social distancing gain acceptance and understanding by the population at large. I think a gradual recovery in travel the next 12-18 months is a reasonable assumption.
The U.S. stock market could still succumb to a meaningful sell-off later this summer or in the autumn/winter from increased cases of the novel virus. Given another round of travel plan suspension by businesses and consumers, a lower Booking Holdings quote should be viewed as a welcome development for equity buyers. While a drop back to $1,500 a share or lower is definitely a possibility, I believe the odds of long-term outperformance of the S&P 500 are growing nicely.
A safer balance sheet and high-margin business are worthy of your consideration, especially in a diversified portfolio creation. If you are searching for a lower-risk travel business, with significant upside when the economy recovers, look no further. Booking Holdings has been a top choice and performer the last two decades. With plenty of relative value at current quotes, a travel sector recovery should be good news for stockholders for years to come.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is suggested before making any trade.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BKNG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.