Profitability is one of the main factors one must look at when analyzing a company. It is not only the reason why a company exists, but also a key element when determining whether to invest in a company or not. Thus, in this article I will look into TripAdvisor's (TRIP) earnings and earnings growth, profit margins, profitability ratios and cash flow. Additionally, I will evaluate which institutional investors bought the stock in the recent quarters (institutional backup can tell a lot about a stock).
The first step when analyzing TripAdvisor Inc is evaluating its recent earnings per share performance. Certainly, how a company has performed in the past is helpful information, since it provides strong clues about how it will handle the future. Barring some unforeseen circumstance, most companies move in a predictable manner.
The company generated -2% EPS growth last quarter compared to the same quarter in the past year.
I am looking for quarterly growth rates above 15%. I am not encouraged to see that TRIP generated less than that number. Past growth winners (Apple (AAPL), Baidu (BIDU), etc) generated consistent quarterly EPS growth above 15% and I am certainly looking for that level before investing.
It is important to highlight that analysts just upgraded its estimates for the current year, increasing projected EPS to9%.
I also look at the 3-year annual average EPS growth rate to get a perspective on how the company grew in recent years. TRIP generated 19% annualized average EPS growth in the past 3 years. The company generated strong growth in the past 3 years, in fact higher than the 15% threshold growth level I use for these kinds of companies.
In addition to analyzing EPS growth, I focus on evaluating TRIP's top line or revenue growth. The value of common stocks is, of course, closely tied to the sales power of the company. Therefore, an understanding of the company's growth potential for both the near and long-term timeframes is required before in a sound investment decision.
TRIP generated 20% quarterly revenue growth compared to the same period last year.
TRIP generated strong revenue growth. This was fueled by improved product adoptions and continued success in management´s strategy to expand into emerging markets. I require a minimum of 15% quarterly sales growth when investing in high growing companies and TripAdvisor Inc generated more than that level.
When quarterly revenues grow at a faster rate than EPS, I usually interpret it as a good sign. This is exactly the case at TripAdvisor Inc, which generated revenue growth levels above its own EPS growth levels. In general, the opposite happens. Managements mask earnings growth and show very different revenues and earnings growth levels (revenues are more difficult to trick using accounting tactics).
I also tend to look at how TripAdvisor Inc increased its earnings over the past 3 years. TRIP generated an average 3 year annual sales growth of 24%. This is a very important metric that Investors Business Daily (IBD) - the best source for growth stocks ideas - pays attention to when analyzing high growth companies, and so should you.
I require a minimum 3 year annual sales growth above 15% and TripAdvisor Inc meets that criteria.
Gross Profit Margin
The gross profit margin is a measure of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of the goods/services sold. A company that operates on a higher profit margin than its competitors is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings as these should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).
In the case of TripAdvisor Inc, its gross margins over the past years have increased. The 5-year low for the gross margin was reported at 98.3%. On the opposite, the 5-year high for the margin was reported in 2012, when the company retrieved a 99.2% margin. In fact, the 2012 gross profit margin of 98.4% is above the 5-year average of 98.2%.
A gross margin above the 5-year average implies that management has been successful in making manufacturing and distribution during the production process more efficient over the past 5 years. I like to find companies that operate with high profit margins.
Operating Margin = Operating Income / Total Sales
The operating margin is a measure of the proportion of a company's revenue that is left over after paying for variable costs of production, such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs such as interest on debt. If a company's margin is increasing, it is earning more per dollar of sales. Needless to say: the higher the margin, the better.
Over the past 5 years, TripAdvisor's operating margin has been increasing. In 2008, the company reported an operating margin of 41.9%. In 2012 the company had an operating margin of 38.8%.
The 2012 operating margin of 38.8% is above the 5-year average of 34.7%. This implies that there has been an increase in the percentage of the total sales left over after paying for variable costs of production such as wages and raw materials compared to the 5-year average. I am always looking for companies that have improving operating margin trends.
Net Profit Margin = Net Income / Total Sales
A ratio of profitability is calculated as net income divided by revenue, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
The profit margin is a very useful metric when comparing companies in the same - or similar - industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage. A 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.
Over the past 5 years, TripAdvisor Inc's net profit margin has been increasing in comparison to the five-year average margin. The net profit margin of 25.44% in 2012 is above the 5-year average of 24.27%. This implies that there has been an increase in the percentage of earnings that the company is able to keep compared to the company's 5-year average.
The listed profitability margins are revealing that the company is gaining strength. I require strong net profit margins when investing in a stock for the long term.
ROA - Return on Assets = Net Income / Total Assets
ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."
The 2012 ROA of 18.18% is slightly above the 5-year average of 16.16%.
As the 201S ROA of 18.18% is above the 5-year average of 16.16%, This implies that management has ameliorated its ability to use the company's assets to generate earnings over the past five years.
Free Cash Flow = Operating Cash Flow - Capital Expenditure
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
TripAdvisor Inc generated a ratio of cash flow from operations/total sales of 27.50. The higher the percentage, the more cash available from sales.
If a company is generating a negative cash flow, it shows up as a negative number in the numerator in the cash flow margin equation. This means that even as the company is generating sales revenue, it is losing money.
Several institutional investors have been buying TRIP in recent quarters. This is important because hedge funds use strict fundamental procedures before investing in a stock.
I feel encouraged that Julian Robertson and Steve Mandel bought the stock in the past months at an average price of $38.97. This shows that hedge funds have confidence in the stock.
Currently, many analysts have a good outlook for TripAdvisor Inc. Analysts at MSN money are predicting TripAdvisor Inc to retrieve EPS of $1.68 for FY 2013 and, $2.20 for FY 2014. Analysts at Bloomberg are estimating TripAdvisor Inc's revenue reach $937.10M million for FY 2013 and $1.15B million for FY 2014. On 23/09/2013, Stifel gave TripAdvisor Inc a rating of "Buy" with a target price of $105.00. A $105.00 price target signifies significant upside potential from this point.