For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.
For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at MakeMyTrip
What MakeMyTrip does
MakeMyTrip is an online travel and solutions company with a focus on India, providing air, rail, and bus tickets; hotels; packages; and ancillary services such as travelers insurance and visa processing. In its latest fiscal quarter, MakeMyTrip reported sales growth of 50%, with adjusted earnings per share growing to $0.08 from $0.03. With India's online market still in its infancy, growth rates are high. However, they remain challenged by higher fuel costs, airline capacity cuts, and slower global growth.
Whom it competes against
Although there aren't any direct Indian-market competitors, there's no shortage of publicly traded online travel solution companies. You've often heard me harp on priceline.com
Here's a quick look at whom MakeMyTrip is attempting to split the global travel solutions pot with:
Source: Morningstar; figures current as of June 25, 2012.
No, you're not seeing things, and you're probably already wearing your glasses: MakeMyTrip is valued at 188 times cash flow. One negative aspect about MakeMyTrip's expansion is that it has needed to spend, spend, and spend some more on administrative expenses. Now let's compare this to Ctrip.com International, which is China's largest online booking site. Ctrip.com is valued at just nine times cash flow with a considerably lower forward P/E, despite both companies predicting solid growth rates. With the projected growth rates of both India and China hovering between 6.5% and 7.5%, Ctrip.com appears to be the smarter investment of the two.
Diversification also plays a big role in enhancing profits in the online travel industry. Priceline has reaped great rewards from its expansion into Europe. Expedia followed suit many years later, and not surprisingly, it too has seen its stock surge to new highs. Orbitz, on the other hand, lacks the international diversification of Priceline and Expedia, and as such, sales have grown at a snail's pace for the past three years.
After reviewing the prospects for MakeMyTrip, I've decided to make a CAPScall of underperform on the company for two primary reasons.
For one, the valuation just doesn't make sense. If you want a value play, Expedia offers international exposure at a much lower premium. If you're interested in rapid expansion, Ctrip.com offers exposure to China's rapidly growing market. Or you could even buy into Priceline, which is the 800-pound gorilla of the online-travel group. In fiscal 2011, Priceline brought in nearly $1.3 billion in free cash flow, while MakeMyTrip had a free cash outflow of $9 million -- take your pick!
Also, MakeMyTrip is in hot water with some of India's largest airlines over the posting of opaque fares. These fares are deeply discounted air seats that don't reveal which airline the seat is with until after the bidding process is closed. Two of India's most prominent airlines, IndiGo and Jet Airways, have expressed concern about the use of opaque fares, and India's Directorate General of Civil Aviation has asked that online sites refrain from using them. MakeMyTrip's apparent noncompliance could create an irreparable rift between it and top Indian airlines if it's not careful, as the Fool's Matt Koppenheffer noted.
You can follow this selection, as well as all previous CAPScalls I've made, by clicking here to be immediately whisked away to my CAPS portfolio.
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