As shown in the GuruFocus chart below, gurus have been busy buying shares of Trip.com Group Ltf (TCOM, Financial) over recent quarters. Let's take a look at this Chinese online travel company to see why this is the case.
What is Trip.com?
The company describes itself as "a leading travel service provider for accommodation reservation, transportation ticketing, packaged tours and corporate travel management" in its 20-F for 2019.
It aggregates hotel and transportation information for business and leisure travelers, enabling them to make "informed and cost-effective bookings." It operates through more than a dozen subsidiaries and associated firms, most using some variation of 'Ctrip' in their names.
Business and leisure travelers who do not travel in groups are its target market, for which it provides both domestic and international travel, with an emphasis on the latter. According to the company, these clients, known in the travel industry as frequent independent travelers, or FITs, represent an underserved but fast-growing segment of China's travel market.
As for its place in the Chinese market, it considers itself the largest consolidator of hotel accommodations and the largest consolidator of airline tickets. It is also able to add value for travelers (and revenue for itself) by cross-selling its services. "When users search for any of the three transportation products on our database, our system can automatically provide the recommendations to the other two transportation modes with the same dates, origins and destinations."
In the U.S., it offers American Depository Shares, or ADS's, for American investors to more easily buy its shares, and eight of them are equal to one ordinary (Chinese) share. At a meeting coming up on March 18, the board of directors proposes to change that relationship from 8-to-1 to 1-to-1. The company added that ADS holders will continue to have the same percentage interest in Trip.com and the effect on the per-ADS trading price on Nasdaq will be neutral.
Competition
Trip.com competes in both the hotel and transportation ticketing markets with domestic and international consolidators, as well as online travel search and service-provider platforms, including those of other major internet companies and traditional travel agencies.
Regarding internet travel companies, that includes Expedia (EXPE, Financial), Kayak (owned by Booking Holdings, Inc. (BKNG, Financial)), Orbitz (FRA:32O), Priceline (also owned by Booking Holdings) and Travelocity (now owned by Expedia).
Despite foreign market competiton, it has an edge in its main market: "We believe the cutting-edge technology used throughout our quality services distinguishes us from our competitors in China. Our goal has been to build a reliable, scalable, and secure infrastructure to fully support our customer service centers, mobile and website operations and one-stop travel platform."
Fundamentals
The Covid-19 pandemic began just over a year ago and slammed the travel industry worldwide. Trip.com was no exception, as this five-year chart of its diluted earnings shows:
That weak showing is one of the reasons why it gets a low mark for financial strength:
There's also the matter of rising levels of debt, which was increasing even before the pandemic:
Still, as the below chart shows, its cash-to-debt ratio is consistent with the other big players in the travel industry:
Profitability
There's not much to cheer about in the profitability table, either. The margins and return on equity (ROE) are all negative, although we see revenue growth is positive. Looking at the revenue line on this five-year chart shows the company reversed its slide in the third quarter of 2020:
Dividends and share buybacks
The company does not pay a dividend, and it has been issuing new shares rather than repurchasing them:
Why would gurus be interested?
Based on all the negative information and data we've just gone through, why would so many gurus be buyers rather than sellers?
The promise of recovery probably tops that list. With vaccines rolling out around the world, many investors see not only better times ahead, but also pent-up demand for the things we've mostly been unable to do over the past year. Travel is high on that list.
Because China went into the pandemic earlier and managed to slow the spread of the disease more effectively than the U.S., consumers in China will be among the first to resume travel. As the company noted in its third-quarter earnings release, "domestic business continues to show strong recovery momentum."
In addition, the rapidly growing middle class in China is likely to have been an influence, with healthy growth predicted. This chart from Statista shows the revenue of the online travel agents in China from 2015 to 2019 with forecasts for this year and next:
We also know consumers everywhere are switching from conventional travel booking to online booking. Online provides a way to do wide-ranging and in-depth research before making commitments, so the trend to more online searching and booking is likely to continue.
After a three-year decline, the share price has been recovering (although most gurus began buying before the upturn started):
As one of the largest, if not the largest online travel agency in China, there are likely expectations that it will benefit disproportionately from a recovery.
Eleven of the investing greats had positions in the stock at the end of the year, with the following gurus making changes in the latest quarter:
- Frank Sands (Trades, Portfolio) of Sands Capital Management increased his holding by 115.49% in the fourth quarter to 11,890,618 shares. They represent 2% of Trip.com's common shares and 0.38% of Sands' assets under management.
- Ken Fisher (Trades, Portfolio) of Fisher Asset Management finished the year with 10,141,421 shares after increasing his stake by 2.3% in the quarter.
- Jim Simons (Trades, Portfolio) of Renaissance Technologies owned 6,478,733 after a reduction of 10.04%.
Conclusion
One of the tenets of value investing is to buy good companies with temporarily depressed share prices. Trip.com Group appears to be a good company that has suffered, along with its peers, from the travel shutdowns that came with the pandemic. Given a few more months, it seems likely the firm will be able to get back to business-as-usual and turn around its financial strength and profitability metrics.
That, I would guess, is also the main thesis for the gurus who have bought heavily into it. With their investments, they get an early start on recovery from the pandemic.
Value investors might like the price pattern that is unfolding but may balk at the current weakness of the balance sheet. Growth investors might be best suited for Trip.com because of its longer-term promise.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
Read more here:
- Rollins: Its Dividend Was Cut, but Total Returns Remain Above Average
- Hawaii Electric: Is This a Good Time to Buy?
- S&P Global: Strong Profitability at a Price
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
