Lackluster investor response to great earnings reports have been common for the first quarter of 2018. Many shareholders worry that current growth rates are as good as they'll be and will cool off. Such was the case after Booking Holdings (NASDAQ:BKNG) reported a knockout start to the year.
The rub was guidance, which indicated a slowdown is in order. Total gross travel bookings are expected to grow "only" in a range of 10% to 14%, or 5% to 9% when adjusted for currency fluctuations. Earnings per share should be $15.50 to $16.15, or up 10% year over year at the midpoint of guidance.
Those numbers are hardly worth losing sleep over, and it's worth bearing in mind that Booking underestimates all the time, and is constantly reminding investors to expect decelerating growth as the company gets bigger. Even though some are nervous about a few other factors, smart investors don't need to worry much about them either.
Don't fret the numbers
The first problem is currency. The company got a big boost from the dollar devaluing against other currencies (most of Booking's business is overseas). Management said it has hedges in place to protect its profits, but currency fluctuations will continue to impact gross bookings and revenue. Some years that will be good, others not so much, but it should all wash out over the long term.
Taxes are the second problem. While tax rates for companies that do business in the U.S. dropped after the tax overhaul late last year, Booking expects its tax rate will increase from its prior 17% to a new level of 21% in the second quarter. That's due to its activity outside the U.S. There were other tax increases elsewhere in the world -- the Netherlands was cited specifically -- that will hit the bottom line, too. The increases look modest, though, and are manageable.
The third and final issue is timing. Easter is a busy travel time around the world, and last year that holiday fell in the second quarter. This year it was in the first quarter. That means the holiday bump came early, so Booking is lapping a difficult comparable period that isn't apples-to-apples. Also in quarter No. 2 is the World Cup, which could cause slowdowns in travel. It all ultimately depends on which countries' teams do well (if developed nations' teams advance, expect more travel bookings).
Is it a buy?
All of the above factors are out of Booking's control and will ebb and flow over time. As for factors it does control, the company is making the most of them. As the world develops, an increasing number of people are traveling and using the internet to find accommodations. With a heavy international presence, Booking is positioned to capitalize on that growth in the emerging world.
In developed countries, where booking online is already common, increasing inventory of unique places to stay is a key factor. While Airbnb helped pioneer the trend away from hotels and resorts, Booking.com is actually the leader in the space with 5.2 million homes, apartments, and other unique listings. That number continues to grow at a healthy double-digit percentage rate. Plus, Booking is working on making itself a one-stop shop for vacations by integrating travel, accommodations, and in-destination activities in one place.
All of that said, a detractor might say Booking is already a big company; market cap is currently $100 billion. However, even as the leader in online travel services, it musters only single-digit market share. Thus, there's plenty of room for improvement, and the company continues to make its online experience better for customers and make strategic acquisitions to consolidate more market share. Plus, trailing price-to-free-cash-flow is only at 22.6 after the report, and one-year forward P/E is under 20, all for a company that consistently posts double-digit top- and bottom-line expansion every year.
Management said it believes its stock is worth buying at these valuations, too, having made $1.5 billion in repurchases last quarter. There is another $10 billion left in the current share repurchase plan -- representing 10% of what the company is currently worth -- which will be used in the next two to three years. That's another reason to give investors cheer.
In short, after Booking's first-quarter beat and subsequent pullback, this stock looks like a great buy.