When the Covid-19 and economic crises hit, it was like the proverbial load of bricks landing on the travel industry. The share price of Booking Holdings Inc. (BKNG, Financial), a broker of hotel, flight and other travel services, dropped dramatically; the pessimism of shareholders was confirmed when its first-quarter 2020 financial results were released:
- The value of first-quarter gross travel bookings fell 51% from a year earlier.
- A net loss of $699 million as compared with net income of $765 million the year before.
- On an earnings per share basis (diluted), it was minus $17.01 per share, compared to positive $16.85 per share in the same quarter of 2019.
Despite all that bad news, there is reason for optimism in the longer term.
The company uses these words to describe itself: “We connect consumers wishing to make travel reservations with providers of travel services around the world through our online platforms.” Note that Booking is not an owner of travel facilities, it is a broker connecting consumers and vendors, a big difference when economic times are bad.
It provides those connections through six subsidiaries:
It added, “While historically our brands operated on a largely independent basis and many of them focused on a particular service (e.g., accommodation reservations) or geography, we are increasing the collaboration, cooperation and interdependency among our brands in our efforts to provide consumers with the best and most comprehensive services.”
Thirty of the gurus followed by GuruFocus had holdings in Booking at the end of March. Dodge & Cox was the largest with 1.7 million shares, followed by Pioneer Investments (Trades, Portfolio) (242,387 shares) and First Eagle Investment (Trades, Portfolio) with 242,387 shares.
Dodge & Cox commented on the company in its first-quarter commentary, saying: “Booking is in a very strong financial position, with close to no net debt, access to additional liquidity, and a very low fixed cost structure.” It pointed to the fact that the company is strictly a broker and does not own or lease any operating assets; it is an online marketplace and thus has a more flexible operating model.
In his first-quarter shareholder commentary, Steven Romick (Trades, Portfolio) of the FPA Crescent Fund wrote, “Booking attracted us with, in our view, the long-term strength of its business and a strong balance sheet with net cash, further complemented by several billion dollars of investments in various securities. We also expect Booking to pare its expense structure, albeit with some lag, to protect profitability.”
David Herro (Trades, Portfolio) and Bill Nygren (Trades, Portfolio) of the Oakmark Global Select Fund also expressed confidence in their quarterly commentary: “Booking is a high-quality company that maintains a healthy market share, strong brands and scale advantages in the online travel agency industry. Booking benefits from an increasingly powerful network effect, an overall transition to booking travel online and a generational spending shift that appears to favor 'experiences' over 'material possessions.'”
Booking receives a medium rating for its financial strength:
The first ratios in this table show us Booking has debt on its books, and a couple of other metrics show us how it will be able to handle that debt:
- Interest coverage: At more than 18.8 times, it has more than ample resources to meet its interest obligations.
- WACC vs ROIC: Weighted average cost of capital is 5.96%, while return on invested capital is 27.17%, meaning the company earns more than four times as much on equity and debt capital than it costs.
Turning to the 30-year financials, we note Booking has $7.189 billion in cash, cash equivalents and marketable securities compared to $7.991 billion in long-term debt and capital lease obligations. As Dodge & Cox noted, it has “close to no net debt.”
Next, the profitability rating is very strong:
The operating margin, net margin and return on equity are all very robust, indicating the company has at least something of a competitive moat that protects its prices from competition. That’s reflected in the growth rates of revenue, earnings before interest, taxes, depreciation and amortization and earnings per share.
On valuation, another medium rating:
Looking specifically at the price-earnings ratio, we see it is relatively high compared to the market as a whole. In narrower contexts, though, we see it is in the middle range among its 525 peers in the Travel & Leisure industry and is lower than it has been in its own past.
For more specific information, we can use the discounted cash flow calculator. It tells us the “fair” or intrinsic value of Booking is $2,241.02, significantly higher than its current price of $1,682.17. That provides a 25% margin of safety.
The fundamentals converge around and confirm the opinions of the three gurus who had written about Booking. There’s lots of evidence to suggest it will do well again in the future, assuming we have a relatively quick recovery, something like the V-shaped recovery that followed the 2008 financial crisis.
But what happens if we have an L-shaped recovery, with years of depressed economic activity before the economy recovers? Much of the travel market is based on discretionary spending; it is not an essential like groceries.
From this initial survey, it appears Booking Holdings could be a value stock with a 25% margin of safety, a modest amount of net debt and a business model that does not involve ownership of facilities.
As noted, that’s all fine, but there is uncertainty because we do not know if there will be a second or even a third wave of the coronavirus, and if they do occur, how much will they restrain the travel market?
Ultimately, though, the business model is the most compelling variable. A company with few fixed costs and limited debt servicing costs should be able to survive multiple years of diminished revenues.
Disclosure: I do not own shares in any companies named in this article and do not expect to buy any in the next 72 hours.
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