Booking Holdings: Leisure Travel At Risk (NASDAQ:BKNG)

Investment thesis

Booking Holdings’ (NASDAQ:BKNG) results for Q1 FY12/2022 highlighted positive management commentary about gross bookings in April 2022 reaching pre-pandemic levels. Despite such positive data, the shares have reacted little. We believe the cost of living crisis will hit holiday behavior negatively into H2 FY12/2022, slowing the pace and scale of recovery. With consensus estimates looking too bullish, we rate the shares as neutral.

Key financials and consensus earnings estimates

Our objectives

The loosening of travel restrictions post COVID19 should herald a period of strong demand for Booking Holdings, coming in the form of pent-up demand from both business and leisure travelers. Booking’s shares have outperformed the NASDAQ Index in the last 12 months but not by a very large margin.

In this piece we want to assess the following:

• Assess the level of current demand for travel, and its outlook given the softer outlook in consumer sentiment.
• Revisit our sell recommendation from March 2021, taking into account consensus estimates for the next two years.

We will take each one in turn.

Demand remains soft

The conclusion we come to is that unfortunately for the travel industry, demand currently remains softer than hoped. With many parts of the world facing a cost of living crisis, and the Russian invasion of Ukraine resulting in a major increase in the cost of basic goods, we believe this will have a significant negative impact on the future recovery of leisure travel.

We find data disclosed by the UNWTO (United Nations World Tourism Organization) as one indication of the tourism industry’s health. Although the data available is not fully up to date, their Tourism Recovery Tracker highlight positive data YoY in the recovery in travel sentiment and short-term rental demand for April 2022. However, what remains deeply negative YTD range from actual air reservations down 70% YoY, hotel bookings down 69%, and low hotel occupancy rates at 58%. There is evidence of recovery elsewhere, for instance, Japan has seen a 1,185% YoY increase in overseas travelers in April 2022 but this remains down 95% from the levels seen in pre-pandemic April 2019. The hurdle rates versus pre-COVID19 levels are extremely high.

The risk from rising costs will impact customers as well as the hospitality trade itself, which is also facing rising input costs in energy, food and wine, and payroll. A potential drop in supply will also be a negative for travel sites as merchant volumes begin to drop off.

Business travel appears to be faring better. American Express Global Business Travel (which is merging with SPAC Apollo Strategic Growth Capital (APSG)) commented that the first three weeks of April 2022 saw transactions reach 72% of 2019 levels. There appears to be stronger momentum here versus leisure with the corporate world returning to travel. The issue here would be that with business travel making up around 20% of the total market, the industry can only be truly saved with leisure volumes returning.

The consensus looks too bullish (again)

In our previous comment in March 2021, we felt that consensus forecasts were too bullish, particularly for business travel recovery and we rated the shares as a sell. This time, we believe consensus is once again being too bullish for the following reasons.

For FY12/2022, we believe the ‘bumper’ summer of demand is unlikely to be sustainable. In the results call for Q1 FY12/2022, management commented that at Booking.com gross bookings for the summer period were over 15% higher than at the same point in 2019 – but a high percentage of these bookings were cancelable and the booking window had recovered (people booking ahead were similar to pre-pandemic levels, hence have ample time to cancel). The key issue is over how sustainable this demand profile is versus a one-time recovery from pent-up demand. With the current macro environment, we cannot envisage a steady recovery that spills over into H2 FY12/2022.

What also seems too bullish is consensus estimating that the company’s annual revenues will keep recording double-digit growth into FY12/2023 (+16.4% YoY) and FY12/2024 (+12.7% YoY). In the heady days of growth between FY2015-2019, the company grew sales by 13.0% YoY CAGR – we find it very hard to believe that it can match such growth rates considering inflationary cost pressures, falling standards of living, and higher hurdles YoY.

The two current areas of weakness for the company are the Asia mark
et and long-haul international travel. With travel restrictions becoming lifted, there will be a surge in demand but the issue will be the rate of recovery in ADR (average daily rates) in accommodation which will take some time. Also, in the world of remote work, the need for business travel has fallen which will have a lasting impact on international travel volume.

Booking Holdings could aim to increase market share to accelerate topline growth, but we believe the overall market pie needs to expand for the company to perform per consensus estimates. This does not look likely to us at this point.

Valuations

On consensus estimates (in the table above in the Key Financials section) the shares are trading on a free cash flow yield of 5.7% for FY12/2023. This is an attractive yield and would place the shares in the undervalued category. However, with consensus estimates appearing too bullish we believe a more realistic yield to be around 4%. Consequently, the shares look more fairly valued.

Risks

Upside risk comes from a sustained demand recovery in leisure travel as restrictions are lifted and consumers begin to allocate spending on holidays. The company has witnessed strong numbers in April 2022, and if such trends continue the outlook is positive.

A relatively swift end to the Russian invasion of Ukraine will assist in lifting consumer sentiment as well as placing some downward pressure on inflation (particularly for agricultural food prices).

Downside risk comes from the increase in the cost of living which leads to travelers ‘trading down’. The selection of accommodation concentrates on lower priced inventory resulting in falling ADR and revenues.

A protracted conflict in Europe risks getting other sovereign countries getting involved, which would place pressure on the European travel market. The cancellation rate may increase as a result.

Conclusion

Despite encouraging comments from management about recent trading, the company’s shares have reacted little. We put this down to the market assessing the risk of a global recession and the negative impact this will have on holiday behavior. Whilst we expect a recovery for the business, we believe the pace and scale will be slower and smaller than current consensus estimates. With market expectations being relatively high, we now rate the shares as neutral.