Booking Holdings (BKNG) – The Trifecta from a Morgan Stanley Research Note
BKNG delivered 1) faster than expected topline growth; 2) better than expected profitability (highest 4Q incremental margins in 6 years); 3) increased shareholder returns. Online travel remains healthy and BNKG is driving the industry.
Faster Growth + Better Profitability + Capital Returns = Maintain OW: BKNG’s 4Q:17 results (room nights/EPS 100bp/19% better than expected) and 1Q:18 guidance – top end of room night/EPS guidance 100bp below/10% ahead of us – speak to BKNG’s ability to continue to drive profitable growth even while investing in building room night supply, alternative accommodations and its tech stack (AI/ML, etc). Note too that 1Q profitability would have been $65mn higher if not for accounting revenue recognition changes (as mandated by FASB Accounting Standards Update 606).
BKNG Continues to Deliver Best-in-Class Execution… BKNG’s bigger top line speaks to the still-long runway in online travel… and BKNG’s ability to drive this industry. In addition, the company’s performance marketing optimization efforts (which led to the highest 4Q incremental EBITDA margin in 6 years – 4Q:11) highlights how even this 21-year old, highly cash flow generative company is still finding ways to optimize its growth. We are also encouraged by the strength of direct business (which increased in BKNG’s mix), which is bullish for the long-term customer economics and lifetime value.
… And Drive Shareholder Value at the Same Time: Lastly, BKNG joins EBAY and EA in our coverage as it has chosen to capitalize on the recent legislative tax changes and its $18bn of cash (~90% of which is offshore). More specifically, BKNG announced a new $8bn share repurchase program (in addition to the ~$2bn remaining as part of its existing authorization) and is also retiring $700mn of dilutive convertible debt (due on March 15, 2018). BKNG is moving quickly too, as it has bought $380mn of stock quarter to date… looking ahead, we expect BKNG to steadily shrink its float to drive EPS growth. As such, we are increasing our 2018/2019 share repurchase assumptions by 150% (now modeling $2.5bn annually both years).
Raising ‘18/’19 EPS by 1%/4%…PT to $2,240 Remain OW: Adjusting our model, we raise our ‘18/’19 adjusted EBITDA by 2%/3% and adjusted EPS by 1%/4%. Note that our EPS increase is partially offset by a ~200bp increase in the tax rate related to recent legislative tax changes and the Innovation Box Tax rate increase. We raise our PT to $2,240, which implies paying 21x ’19 EPS and remain OW.