Booking Holdings: A better-than-expected 2Q19

Online-travel company, Booking Holdings, parent of Booking.com, Priceline and Kayak, reported 2Q19 results on Wednesday (7 August), which came in above management guidance and Street expectations. It posted 2Q19 net income of $979mn (ticking up by $1mn from 2Q18), or $22.44/share, vs $978mn, or $20.13/share, in 2Q18. Adjusted earnings were $23.59/share. Revenue rose 8.8% YoY to $3.85bn vs $3.54bn in 2Q18. FactSet consensus analyst forecasts had expected earnings of $22.69 on revenue of $3.75bn. Non-GAAP gross profit/ revenue advanced 7% YoY (14% in constant currency [cc] terms), which comes to 9% YoY cc growth when adjusting for the timing of the Easter holiday this year. Non-GAAP EPS was up 12% YoY when adjusted for foreign exchange and the timing of Easter. Operating cashflows rose by 8% YoY, while free cashflows were 10% higher YoY at $1.7bn.

Gross bookings increased by 10% YoY in cc terms, while sequential acceleration (QoQ) was well above guidance. Here room nights were up 11.8% YoY, while room rates were down 1.5% YoY in cc terms (the mix effects were, however, the same as 1Q19).

Adjusted EBITDA rose 5% YoY (up 10% in cc terms), with 90bps of operating leverage in the quarter. This was driven by faster growth in direct traffic on the back of increased brand ads spending (+41% YoY – a 110-bpt operating deleverage). Sales and Other grew by 22% YoY (an 80-bpt deleverage), mostly due to payments platform spending.

Booking repurchased $2.6bn of stock in the quarter under review. There is now c. $14bn remaining in its repurchase authorisations, which is expected to be completed in the next 2 to 3 years (this is equal to 17% of market cap). The firm’s net cash stood at $2.7bn.

There was very little detail on its alternative accommodation business (i.e. Booking’s competitor to Airbnb), apart from management mentioning that it’s growing faster than traditional accommodation.

Management also spoke about the potential for bundling (and monetising) attractions with its travel and accommodation offerings. However, we struggle to get very excited about the potential, given the much-lower ticket sizes relative to accommodation. It’s difficult to see how it will move the needle for the company, at least in the context of Booking’s size.

Looking ahead, Booking expects 3Q19 earnings of $43.60-$44.60/share, while consensus analysts had forecast $44.06/share.

Booking Holdings is now a fairly mature, moderate growth business and, on the positive side, the stock is cheap, the company is highly cash generative, and management is buying back heaps of its own stock. However, on the negative side, we remain concerned that Booking’s properties are being commoditised by Google at the one end, and branded hotels at the other. Over the medium term, we believe that Booking will have to choose between faster growth at lower returns on capital or maintaining returns with lower growth. We also see Airbnb’s IPO as a potential catalyst. Nevertheless, for now, we are pencilling in a low-teens internal rate of return over the next 3 years, which is still attractive enough to justify the position

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