Booking Holdings: Great Business At A Really Great Price, 50% Upside Potential

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About: Booking Holdings Inc. (BKNG), Includes: I
by: ValueX
Summary

BKNG is one of the top-quality online travel booking businesses with a ROE of 39.4%.

BKNG still boasts strong top line growth in mid-teen range; it reported 14.5% yoy revenue growth in FY18.

BKNG benefits from industry tailwind; BKNG is the global leader in the online travel booking market which is expected to grow at around 12% a year through 2026.

This great business is currently trading at a forward PE of around 15x and a PEG of around 1.1x.

That is a great price given the quality and strong growth prospect of this company.

Description

BKNG is the market leader in online travel booking business. It operates six primary brands which are:

Booking.com – the world’s leading brand for booking online accommodation.

KAYAK – a leading online meta-search service which allows consumers to search and compare travel itineraries and prices.

Priceline – a leading hotel, rental car, airline ticket, and vacation package reservation service in North America.

Agoda – a leading online accommodation reservation service in the Asia-Pacific region.

Rentalcars.com – a leading online worldwide rental car reservation service.

OpenTable – a leading online provider of restaurant reservation and information services to consumers and restaurant management and customer acquisition services to restaurants.

BKNG is a highly scalable business with huge network effects. As BKNG offers more rooms and unique places to stay at affordable price, that attracts more customers to join its website. In turn, this increasing customer base will attract even more hotels to join this ecosystem. BKNG is benefiting from this virtuous cycle and is well positioned to capitalize on growing online travel bookings.

Investment Thesis

Mr Market’s myopic view and short-term trading mentality are offering this great business at a screaming bargain price. BKNG did provide soft 1QFY19 guidance due to macro headwinds in Europe. However, if we take a long-term view, no one is going to argue that online travel booking market will continue to grow over time and BKNG is the dominant market leader in that industry.

According to Zion Market Research, the global online travel booking market was valued at approximately USD 765 billion in 2017 and is expected to generate USD 1,955 billion by 2026, growing at a CAGR of around 12.1% between 2018 and 2026. I also believe that the company can maintain double digit top line growth - along with even higher EPS growth through share repurchases- over the medium term due to industry tailwinds supported by (NYSE:I) offline to online booking, (II) adoption of mobile devices, and (NASDAQ:III) growth of travel worldwide, especially in Asia Pacific region.

In addition, it has much better profit margin, ROE, and strong top line growth compare to its peers (shown below) and has shareholder friendly capital allocation strategy, as evidenced by its announcement to buy back shares – up to 8 billion dollars. All of which is driven by the company’s great product offerings and its relentless focus on cost. I expect the company to generate free cash flow going forward and will allocate the free cash flow in a similar manner.

To top it all off, it is trading at around 15x forward PE ratio and at around 1.1x PEG ratio. Even for a normal business, PEG ratio of 1x will provide solid return over time. Given BKNG’s strong fundamental and growth prospect over the medium term, I believe such PEG ratio provides compelling upside potential.

Valuation

Below tables show BKNG’s trading P/E and EV /EBIT multiples over the last ten years. If I just assume these multiples to recover from current level to their average over the next 12-24 months, then the multiple re-rating itself will deliver around 30% return. On top of that, EPS will grow at around mid-teen level p.a during that period. In total, the stock has upside potential of around 50% over the next 12-24 months.

Source: Bloomberg

Disclosure: I/we 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.