Booking Holdings BKNG released earnings after market close yesterday evening and missed on both revenue and earnings. The stock proceeds to rally over 4% in morning trading, even as the broader market breaks down. The firm showed year-over-year decreases in both sales and EPS.
The rationalization for why BKNG is rallying in the midst of earnings misses and negative growth lies with its accounting methodology. Revenues aren’t recognized when reservations are made, they are accounted for when the reservation comes to fruition. Expenses, on the other hand, are recognized immediately when they are accrued. Q1 is when Booking Holdings receives the most reservations because individuals are planning their vacations for the year, but the majority of these reservations won’t be executed until Q3 (meanings revenue won’t be recognized until then). Expenses associated with these revenues are immediately recognized, as I mentioned. This pushes earnings way down for Q1, making it the worst quarter for the firm annually. Having a worse than expected first quarter isn’t necessarily a bad sign for BKNG, it could mean the firm is anticipating a big year.
Booking Holdings analysts would assess the balance sheet line item, “deferred merchant booking”, to determine the cash that has been received for reservations but not recognized as revenue yet. This line item is reporting roughly $1.8 billion in locked in revenue yet to be recognized this year, up almost $800 million from the previous quarter. This is illustrating a significant amount of future revenue that the income statement will disclose throughout the year.
Booking Holdings Story
Booking Holdings, previously known as The Priceline Group, went public in the wake of the “dot com” bubble immediately prior to the burst. The stock lost 98.5% of its value from April of 1999 through the end of 2000. Since then Booking Holdings has established themselves as an industry leader, with the stock rallying from less than $10 in 2000 to over $1800 that we see today (almost 12,000% gain).
They have revolutionized the way people look for hotels taking advantage of Google’s GOOGL advertising platforms more effectively than competitors like Expedia EXPE, “turning lookers into bookers”. They spend a significantly higher percentage of their revenue on marketing and advertising than top competitor Expedia, which materializes on their bottom-line.
Booking Holdings acquired European online booking site ActiveHotel.com in 2005 for just $133 million. This deal was called “the best acquisition in internet history” by social media because no other acquisition in this field had been profitable, turning a company that lost millions a year to one that makes billions in less than 10 years.
This firm went from a second rate travel booking site to best in class in a short period of time.
Booking holding owns an extensive portfolio of online booking sites and apps with services ranging from travel reservations to catering reservations. Its current holdings include Booking.com, KAYAK, Priceline, Agoda, Rentalcars.com, and OpenTable.
BKNG has under performed its top competitors Tripadvisor TRIP and Expedia EXPE over the past 52-weeks.
BKNG is the largest player in this industry and is not only able to drive higher revenues than these two competitors but is able achieve significantly higher net margins. Booking Holdings boasts net margins of 27.5% compared to Expedia's 3.9% net margins and Tripadvisor's 8.3%. Booking Holdings has increased its top and bottom-line consistently over the past 10 years. This underperformance in the stock market isn't equating to poor financials and could be a sign of an undervalued stock.
BKNG is trading at a forward P/E valuation of 16.42x, below EXPE trading at 18.56x and TRIP who is reporting a forward P/E of 36.24x. It is also trading at a PEG of 1.28x less than half of TRIP's 2.9x and just below EXPE's 1.35x.
Booking Holdings is expected to grow top line 7.12% and 9.52% over the next two years respectively. They are expecting EPS growth to be 9.8% this year and 11.36% in 2020.
I see BKNG as undervalued, comparing its valuation metrics with other comparable stocks as well as its overall market share and diversification. Booking Holdings is sensitive to economic factors and will lower its valuation if the economy doesn’t hold. If you believe we have another year of strong economic performance than I would consider adding BKNG to your portfolio.
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