Ctrip (NASDAQ:CTRP) is a Chinese travel agency. It first listed on Nasdaq in 2003, and has many different businesses which cover diverse segments of the market, such as airline tickets, hotel bookings, and business tours. It also invests in new businesses, such as car rentals and group packages to cover other segments of the market.
It's dominant in the growing Chinese travel market, and has been for the past 10 years. Continually invests on R&D, strong branding, and focuses on different types of costumers to meet their demands in each segment. It has both online (Ctrip.com) and offline (call centers) channels for its products and bookings. In fact, most of its customers have either the company's internet portal bookmarked, or its call center on speed dial. It recently made some acquisitions of travel agents in Taiwan and Hong Kong, gaining the experience these travel agents have in outbound travel, to seize the demand of eager Chinese globe-trotters.
Ctrip.com International Ltd. Profitability Analysis
Profitability is one of the main factors one must look at when analyzing a company. It is not only the reason behind a company's existence, but also a key element when determining whether to invest in a company or not. Thus, in this article, I will look into Ctrip.com International's 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).
First, I analyze Ctrip.com International's earnings growth. For many stock investors, the most important thing is growth and, specifically, growth in earnings. This is what fuels aggressive growth stocks. Therefore, it is of utmost importance that investors have an idea of how long a company can sustain a certain level of earnings expansion. The company's valuation, and thus the stock price, is almost completely dependent on this fact.
The first step is analyzing Ctrip.com's last quarter's EPS growth. The company generated 11% quarterly EPS growth when compared to the same quarter last year.
It is interesting to see that consensus analysts recently upgraded their estimates for the current year, increasing their EPS projections by -17.30%. This shows that sell-side analysts are confident in the company.
I also look at the 3-year annual average EPS growth rate to get a perspective on how the company grew in the recent years. CTRP generated 2.15% annualized average EPS growth in the past 3 years.
Let's analyze Ctrip.com's revenue growth now. It is important that both EPS and sales grow at similar levels.
Ctrip.com's revenues grew 725.64% last quarter, year-over-year.
It is important to watch beyond quarterly earnings, which are more short-term oriented. It is also crucial to pay attention to how annual sales grew in the past 3 years. Ctrip.com reported an average annual sales growth of 23.19% over the past 3 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.
Ctrip.com generated a ratio of cash flow from operations/total sales of 0.46. A higher percentage means 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 though the company can generate revenue, it is losing money.
I also evaluate recent institutional activity in the stock. In other words, I want to know which hedge funds bought the stock in the recent quarters.
Prominent investors RS Investment Management and Louis Moore Bacon bought the stock in the past quarter at an average price of $52.17. As detailed in my blog, I believe that it is of utmost importance to check which hedge funds bought or sold the stock in recent quarters.
Currently, many analysts have a good outlook for Ctrip.com. Analysts at MSN money are predicting that Ctrip.com will retrieve EPS of $0.91 for FY 2014 and an EPS of $1.37 for FY 2015. Analysts at Bloomberg estimate Ctrip.com revenue to reach $1.14B million for FY 2014 and $1.47B million for FY 2015. On 2/13/2014, Morgan Stanley gave Ctrip.com International Ltd. a rating of "Overweight".
Overall, Ctrip.com is a good company to invest in, since it seizes most of the Chinese growing travel market, and continually develops new businesses to maintain itself on top of new segments and the wider market. Though much has been said about this company's decreasing operating margin, this phenomenon derives from its investments in new business lines like car rental, group booking, and growing businesses, such as corporate travel management and package tours. It has built over the years, a loyal customer base which is highly profitable, since 80% of the bookings come from returning customers. This large customer base makes travel suppliers eagerly want to publish their products on the company's channels. Additionally, China's steady economic growth and increase in disposable income will increase the demand for both business and leisure travel. And the company, having a renowned experience in business and high-end travel segments, will be able to capture that demand. We can also see how the company's Return on Equity is at 11.70, above the industry median, but also not far from the company's historical ROE, thus demonstrating it puts to good use shareholders' money, not only in generating short-term revenue, but also investing in new businesses, branding, and strategic focus to maintain its moat and gain market share in various segments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.