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An Update on Booking Holdings

A year ago, I outlined the rationale for an investment in Booking Holdings (BKNG), a leading global provider of travel accommodations. Here's what I wrote in the conclusion of that article:



"My sense is that investors should be prepared for weak results in the short term (and the stock price may react accordingly). With that said, I do not think this reflects a narrowing of the moat or any real change in the long-term growth opportunity for Booking. My research leads me to believe the company's dominant position, most notably in the European OTA market, is sustainable. Combined with the tailwind attributable to the shift in consumer spending from traditional offline channels to online channels, as well as the significant cash generation that enables Booking to repurchase a lot of shares and make strategic investments, the company has a long runway of attractive earnings growth ahead (by my math, the company has somewhere around 10% share of the global hotel accommodations market). Near $1,740 per share, Booking trades around 17x trailing free cash flow. I won't go into the assumptions in my model, but I think the company is worth more than $2,000 per share. I have some questions about its capital allocation plans, but that is mitigated in the short term by repurchases at prices that I view as attractive. For those reasons, I have decided to make an investment in Booking."



The stock has had its moments over the past year, reaching a high around $2,100 per share, but it has ultimately gone all of nowhere: today, it trades at $1,660 per share.

Mr. Market's concern today, in my estimation, is not much different than a year ago: people are worried about the potential impact of the new coronavirus on global travel. As management noted on the first quarter conference call, this has indeed been impacting the business:


"At the present time, Greater China has been affected the most. The broader Asia Pacific (APAC) region has also been impacted... We are now starting to see a slowdown in travel globally and are aware of the potential for further demand deceleration around the world... We've seen a recent impact on room night bookings in Europe following the outbreak in Italy... As a result, we're providing only a near-term outlook with a wider guidance range to account for the possibility that there will be a growing travel disruption in Europe."



That guidance, as shown below, implies a material change in the pace of room nights growth from what Booking has reported over the past four years.

The concern is that this headwind will not be contained to the first quarter and may continue for the full year. Personally, I'm okay with that uncertainty. First, Booking's operating model enables them to offset any sustained decline in volumes with lower costs. As Chief Financial Officer David Goulden noted on the conference call, more than half of the company's operating expenses are variable costs that are directly tied to volumes (performance marketing expense alone is equal to roughly 30% of the company's revenues). Second, the company has a strong balance sheet that will enable them to withstand any short-term business issues.. It's likely that they will continue to repurchase billions of dollars of stock this year, which means any declines in the stock price will ultimately be beneficial for long-term shareholders; in 2019, the diluted share count declined by more than 9%. Between those two factors, I'm confident that Booking will be able to withstand the short-term headwinds and come out stronger on the other end.

As shown below, the company has continued to attract significant user activity, with gross bookings in 2019 climbing 4% to more than $96 billion on an 11% increase in room nights reserved to 844 million (note that non-GAAP earnings per share increased double-digits in 2019 as well).

The results over the past ten years reflects Booking's competitive advantages, including its dominant scale in the European hotel market, which is very different than what exists in the U.S. The company also has the structural tailwinds of mid-single digit global growth in travel and continued mix shift towards online bookings. In my opinion, all of those trends will continue to benefit the company in the years to come.

Conclusion

In 2019, Booking generated $4.5 billion in free cash flow, or more than $100 per share. At the current price, the stock trades at a mid-teens multiple on trailing free cash flow.

As shown below, the stock trades at a relative low multiple of forward earnings.

In summary, my thoughts are basically unchanged from a year ago. I think the company's current valuation looks attractive, which is why I added to my position Thursday. My hope is that the short-term issues they are facing will lead to additional selling, pushing the stock even lower. In that scenario, my expectation is that I - and likely the company via repurchases - will continue to buy shares at more attractive prices. In the long run, I think shareholders are likely to achieve attractive returns from this investment.

Disclosure: Long BKNG

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This article first appeared on GuruFocus.