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There’s a theme to today’s Bull and Bear of the Day. The Bull is a company that’s priced at deep value level and the Bear is a company trading at nosebleed highs. The common thread between them is that their current prices seem to be a reflection of expectations that market conditions in both industries will change dramatically in 2021.
In the case of the Bull, investors seem to be anticipating a change in economic conditions that will hurt the lending industry. In the case of today’s Bear – Booking Holdings (BKNG) – investors are looking forward to a huge resurgence in the travel industry. While we all hope that’s the case, there’s a good possibility that it will take longer than expected.
Like most of the industry, shares of Bookings Holdings took a major beating early in 2020 as the Covid-19 pandemic mostly shut down both business and vacation travel. Airlines, hotels and cruise lines now mostly trade at big discounts to their pre-pandemic highs. Former rental car giant Hertz missed scheduled debt payments and filed for Chapter 11 bankruptcy in 2020, wiping out the entire value of shareholder equity.
Booking shares have fully recovered from the March selloff and are now up a bit on the year. It’s great to see that optimism, but there’s a case to be made that the current valuation is overly optimistic.
Formed as Priceline during the 1990s internet boom, the company not only survived the technology crash of the early 2000s, it went on a furious M&A binge that made it the world’s largest operator of travel search engines and fare aggregators. The brand includes Booking.com, Priceline, Kayak.com, OpenTable and many other travel and leisure related businesses in 200 countries worldwide.
In good times, it’s a money machine. The ubiquity and ease of use of its product offerings make Booking the go-to place for internet travel searches. The fact that they don’t have any of the hassles involving physical goods or locations means that every transaction contributes more or less directly to the bottom line. Compared to travel companies that have to buy and maintain planes, boats, cars and real estate properties, Booking has an extremely “clean” business.
Unfortunately, these are not good times for the industry as a whole. Despite the impending rollout of two different FDA-approved vaccines, the numbers of infections and deaths continue to rise to new highs. Most state governments and health officials are specifically imploring people not to travel during the holiday season.
After 9 months of severe restrictions on travel, there’s certainly a lot of pent up demand for vacation opportunities – but when those trips will actually happen is the subject of debate.
Even the rosiest scenario for the vaccination effort means that it will be the Summer of 2021 before a significant enough number of Americans have developed immunity that will allow in-person activities to resume safely. Logistical challenges and some remaining reluctance to take the vaccine threaten to slow the process.
It could be well into next year before the travel industry is firing on all cylinders again and the Zacks Consensus Earnings Estimate for BKNG in the first quarter reflects that, calling for a loss of ($2.51)/share - versus a profit of $3.77/share in the same period a year earlier. Things get much more optimistic after that and full year 2021 net earnings are expected to rebound all the way to $54.10/share.
Including the Q1 loss, that would mean the company is earning an average of almost $19/share in the next three quarters – and it seems to be supporting the share price.
At $2,105/share, Booking Holdings trades at a forward 12-month P/E ratio of 455X. Big P/E ratios are not unheard of - especially for technology companies that are capable of ramping up revenues and earnings quickly, but the optimism for BKNG seems extreme. It wouldn’t take much to extend the pain of lockdowns into the second or third quarter of 2021 and that $54 number would be in severe jeopardy.
Those who held Booking shares during the recovery made a great trade. It probably wouldn’t be a bad idea to take some profits off the table. Investors who are looking for a new opportunity would probably be better served with the shares of a company that doesn’t need a “best-case” scenario to meet the estimates.
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