TCOM - Trip.com Stock: Q4 Earnings Can Set The Stage For A Breakout 2023

Summary

• TCOM is set to report its Q4 earnings on March 6.
• The company is benefiting from a rebound in travel as China moves beyond pandemic-era restrictions.
• A path for earnings to accelerate going forward can lift shares higher.

Trip.com ( TCOM ) shares have been a big winner in recent months, benefiting from a wave of optimism as China moves past pandemic travel restrictions that marked the last several years. The company is recognized as the largest online provider of hotel reservations and flight ticketing in the country through the "CTrip" brand and is well positioned to capture an expected travel boom in the Asia-Pac region going forward.

Ahead of the upcoming quarterly report, we highlight several themes to watch into what may be a breakout year for the company as it reclaims its growth potential. We like the stock as a leader in its segment and view the outlook for firming profitability as a catalyst for shares to climb higher.

TCOM Q4 Earnings Preview

TRIP is set to report its Q4 earnings and full-year result on March 6. Keep in mind that this period ending Dec. 31 was still impacted by "zero-COVID" policies in China that only began to be removed toward the end of the quarter. By this measure, the operating trends and financials are expected to show ongoing disruptions.

Going back to the Q3 results , there already was a recovery in place compared to weaker trends in 2021. Keep in mind that revenues from greater China represent more than 85% of the total business, while TRIP also operates globally through its other brands.

The current consensus is for TRIP to show an EPS loss of -$0.02, narrowing from -$0.24 in Q4 2021. The revenue forecast at $698 million, down -5% year-over-year, is set to still reflect the bumpy road to recovery along with FX volatility based on the international operation.

More important than the headline numbers will likely be management updates on trends into Q1. The reports we're looking at suggest that the recent Chin ese Lunar New Year wa s a turning point for the travel recovery in the country compared to the initial hesitation by some consumers when the government first announced the COVID policy changes.

The question in the Q4 report will be how much of that momentum was captured based on bookings in December or if the impact will be reflected for 2023 figures.

It's worth mentioning that TCOM has an impressive record of "beating" the consensus revenue estimate, with only a single miss in the past five-year over 20 quarters. While the EPS surprise performance is mixed, there's a good chance in our view that the top line comes in strong if the market is underappreciating the strength in the recovery.

What's Next For TCOM?

The story here is that all the pieces are in place for a normalization of travel in China and Asia-Pacific which is simply behind the curve compared to the recovery in other parts of the world.

For TRIP, revenues and operating income over the past year have been at depressed levels and the bullish case for the stock considers a path to ultimately reclaim and exceed those all-time highs over the next few years.

According to the " China Tourism Academy ," the expectation is that domestic travel within China fully recovers to pre-pandemic levels this year, although the full-year figures would still trend 76% of the level from 2019, providing some runway into 2024 and 2025.

Separately, international travel is the segment that has been lagging based on country-specific quarantine measures and testing requirements still in place. For example, the U.S. is still requiring a negative COVID test for Chinese travelers. On the other hand, the European Union and South Korea just recently moved to phase out testing requirements in China.

Data from the McKinsey & Co consulting group suggests a path for a rapid demand recovery in international travel to and from mainland China, mirroring the experience observed in Hong Kong. The expectation is that the trend accelerates through the second half of 2023.

These factors are reflected in the current full-year consensus estimates for TRIP, forecasting 2023 revenue to climb by 50% while EPS approaching $1.04 would be nearly 7x higher compared to the pending final 2022 result. Notably, that fiscal 2024 revenue estimate of $5.6 billion would surpass the 2019 record of $4.8 billion

Beyond simply hotel reservations and flight bookings, the next step of the recovery will include the return of more packaged vacation deals and group travel that often represent value-added and high-margin opportunities.

In terms of valuation, the metric we're focusing on is the EPS estimates of $1.67 for 2024, implying a one-year forward P/E of 21x. This would be in the context of an operating backdrop where revenues are expected to nearly double over the period from the 2022 trends, and EPS climb by more than 61% that year.

From there, TCOM appears attractively priced next to other global travel leaders like Booking Holdings Inc. ( BKNG ) at 16x or even emerging market players like Despegar.com, Corp. ( DESP ) at 28x, which is big in Latin America. Again, the attraction of TCOM is its position in China and Asia-Pac region, where air travel is structurally high growth from an expanding middle class. A scenario where earnings outperform expectations would make the stock appear increasingly undervalued.

Final Thoughts

From the TCOM stock price chart going back several years, it's encouraging to see shares approaching a breakout level near $40.00 which has worked as an area of technical support since late 2019. Positive commentary from management in this upcoming Q4 earnings report would go a long way to confirm the forward outlook. We expect shares can trend towards the $45.00 level that was last reached in early 2021.

Economic indicators out of China are the key monitoring point. This includes not only travel statistics, but also credit conditions and consumer spending. The risk would be for a more concerning setback where trends deteriorate as a headwind for travel demand which would directly impact TCOM's operation.

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