Shares of travel-reservations specialist Booking Holdings (NASDAQ:BKNG) popped in Thursday trading, rising 5.9% through 3 p.m. ET. You can thank UBS for that.
You might not think that the middle of a new wave of COVID-19 infections is the best time to initiate coverage of a travel stock like Booking Holdings -- but apparently UBS disagrees. This morning, the Swiss megabank announced it will rate Booking stock a buy and assigned the shares a very precise $2,838 price target, as StreetInsider.com reports.
As UBS explained, Booking Holdings is literally its "favorite name in travel," and the analyst sees the company growing its earnings before interest, taxes, depreciation, and amortization (EBITDA) margin by as much as 4 full percentage points in 2023 as the company sells more reservations directly to customers. Already, such "direct bookings" account for a majority of all bookings at the company, and UBS expects this percentage to grow to 54% over the next couple of years.
This leaves UBS projecting 38% EBITDA margins by 2023 -- slightly lower than the 39% margins the company was earning before the pandemic in 2019, but slightly above Wall Street projections for 37% margins.
With Booking Holdings' trailing-12-month profits still just a small fraction of what the company earned in 2019, for example, it's hard to make a clear-cut case for why this stock is a bargain at its apparent price-to-earnings ratio (P/E) of more than 200 times earnings. Nevertheless, if UBS is right about Booking's ability to grow profit margins as business picks up post-pandemic, the analyst believes Booking should soon resume trading closer to its historical average P/E of 22.
Applying this multiple to anticipated 2023 earnings, UBS concludes the stock is currently trading for about a 23% discount to intrinsic value -- and deserves a buy rating.