2023-04-25 11:22:43 ET
Summary
- Booking Holdings is expected to show growth deceleration into FY12/2023, making the shares expensive trading on EV/EBITDA 15.1x.
- The latest USD20 billion share repurchase program appears positive on paper but could result in negative book value warranting discount valuations.
- With concerns over consumer spending into H2 FY12/203 and questions over management's capital allocation, we rate the shares as a sell.
Investment thesis
Booking Holdings (BKNG) has a decelerating growth profile in FY12/2023, limiting its appeal as a growth stock with a prospective EV/EBITDA multiple of 15.1x. We view the USD20 billion share repurchase program as a double-edged sword, providing shareholder returns on one hand, but raising questions over management's capital allocation and negative impact on book value. We rate the shares as a sell.
Quick primer
Listed in 1999, Booking Holdings operates a comprehensive offering of online travel services on its six core platforms (Booking.com, Priceline, agoda, Rentalcars.com, KAYAK, and OpenTable), ranging from accommodation, flights, and restaurant reservations. Its key competitors include Airbnb ( ABNB ), Expedia ( EXPE ), trivago ( TRVG ), and Tripadvisor ( TRIP ).
In a very competitive market, the company aims to gain market share by providing the best customer experience when purchasing travel services and having the largest network of partners and merchants to offer the most appealing choice.
In order to make customers sticky, the company has a loyalty program that provides discounts on selected services, with better customer service.
Key financials with consensus forecasts
Key financials with consensus forecasts (Company, Refinitiv)
Our objectives
We want to revisit our neutral rating from May 2022 , where we raised concerns over the cost-of-living crisis negatively affecting consumer behavior towards tourism. Since then, the shares have rebounded by 20%, although we note that consensus earnings estimates have dropped since then.
One key driver for the share price performance appears to be the USD6.6 billion share buyback conducted during FY12/2022, currently equivalent to 6.5% total shareholder return (and approximately 8.5% of shares outstanding). The company announced a USD15 billion share repurchase program back in May 2019 (with USD3.9 billion unused) and has followed this up with a USD20 billion program in February 2023 ( page 55 ) - this is planned to be spent over the next 4 years.
In this piece, we want to re-assess the outlook for consumer activity and see the potential impact of this planned stock repurchase.
Recovery playing out
Two years on from the pandemic, activity levels are normalizing across the board in many sectors including tourism. The company experienced robust growth in Q4 FY12/2022 with bookings up 43.6% YoY ( page 10 ), but that was to be expected considering recent trends and arguably already priced in the shares. Consensus forecasts for FY12/2023 show a marked deceleration in sales growth to 17.5% YoY from 56.0% YoY in the previous year. Momentum is expected to slow and there appear to be no major catalysts for growth to re-accelerate.
Although inflationary cost pressures appear to have peaked in many developed countries, we believe concerns remain over the outlook for consumer spending. The services industry like leisure and restaurants tends to see a delayed impact from a cyclical slowdown, and presently there is still 'noise' from post-pandemic demand making any net negatives difficult to see.
One obvious change is the customer's greater focus on pricing. Expedia's 2023 survey highlighted that most wanted to see 'atypical low pricing' ( page 17 ), as more or less a permanent trend in the market for online travel. This typically results in lower commission rates, making the growth in bookings a lower-quality indicator of future performance.
Business travel has begun to reach pre-pandemic levels of activity on a footfall basis, but enterprises are mindful of managing costs and spending budgets are being limited. We believe this typically higher end of the market is unlikely to recover its monetary levels of contribution for some time.
All in all, we expect to see no positive surprises from a business recovery perspective.
Buyback dependency
Announcing what is effectively a 20% share buyback is usually a positive for shareholders, but there are limitations to its appeal in our view. Firstly, effectively allocating the majority of your free cash flow to fund repurchases basically means management can think of nothing to invest in the business to generate a higher return for shareholders, which is quite a basic and blunt statement to make. There is now limited scope for M&A, as well as further business diversification.
Secondly, if we were to assume that the company was to fully purchase a total of USD23.9 billion worth of stock over the next 4 years, it will have to generate at least USD6.0 billion of net income annually in order not to end up having negative shareholders' equity. Whilst there are high-quality companies with a negative book value or with high PBR multiple such as Starbucks ( SBUX ), McDonald's ( MCD ), and Colgate-Palmolive ( CL ), these companies have significant hidden asset value, such as R&D, brand value, and tangible assets (primarily real estate and plant and machinery) which have higher market value than what has been reported. With enhanced book values, such companies are not negatively impacted in terms of a valuation discount or face difficulty in raising finance. Although Booking.com has become a household name, it does not have franchise-like brand value, and the business itself is asset-light. Consequently, in times of economic hardship, the company will be in a less robust position to survive such downturns. We are not saying that a negative book value is always an indicator of low business quality or warrants a share price correction. However, we believe investors should be aware of the risk of limited future multiple expansions and valuation support if there are no valuable and/or underrepresented assets in the reported balance sheet.
Thirdly, despite having a steady track record of free cash flow generation, the company has no cash reserve - potentially after 4 years of continued buybacks, there is the risk that the business will not be in a financial position to be able to react to future unexpected business challenges.
Valuation
On consensus forecasts, the shares are trading on PER FY12/2023 20.6x and a free cash flow yield of 5.1%, which do not appear too stretched. However, on a decelerating growth profile, and an EV/EBITDA multiple of 15.1x, we believe the shares look expensive.
Risks
Upside risk comes from a major upturn in consumer spending dedicated to higher-end vacations. Both booking volumes and commission rates will rise, benefitting monetization.
Growth deceleration in FY12/2023 may be lower than expected, with continued pent-up 'revenge travel' demand materializing into the second half of FY12/2023.
Downside risk comes from consumer activity visibly wilting into H2 FY12/2023, with economists now expecting a US recession . There are expectations for more transport worker strikers, particularly in the UK and Europe.
Without buyback activity, the fundamentals may not be viewed as attractive enough to support the current share price.
Conclusion
Booking Holdings has navigated its way out of the pandemic, but new economic challenges remain which are arguably deeper and longer-lasting. In some ways, if the coast was clear and the business outlook was healthy, announcing a new share buyback program should not be a high management priority. With limited appeal in valuations, we rate the shares as a sell.
For further details see:
Booking Holdings: Looking Expensive, With A Double-Edged Share Repurchase Plan