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Consistently generating market-beating returns takes both skills and experience. Many hedge funds remain unsuccessful in the long run even after employing some of the best money managers in the world.
Todd Ahlsten, the chief investment officer and lead portfolio manager of Parnassus Investments, is one of the few managers who have a track record of delivering stellar returns to investors. According to data compiled by Citywire, Ahlsten has generated a cumulative return of 65.5% in the last five years, second only to Grayson Witcher of Mawer Investment Management.
Speaking on Barron’s Mid-Year Roundtable on July 2, Ahlsten recommended investing in Booking Holdings Inc. (NASDAQ:BKNG) even as the global travel and leisure industry is going through the most challenging phase experienced over the last couple of decades. The fund manager said:
“Booking is the world’s largest and best-run online travel agency. It has a market cap of $66 billion and did $15 billion in revenue in 2019. The stock is down 23% this year. It is a cheap option on the economy eventually reopening, and on pent-up demand for travel. The company has $14 billion in liquidity and can sustain an 85% sales decline for 2 1/2 years. Hotel operators in Europe need Booking even more today to connect with travelers. The company is widening its moat. Also, it is widening its lead over rival Expedia Group. If it takes Booking three years to get back to 2019 revenue and $115 a share in earnings, and if the stock gets a 20 multiple on earnings, it would trade at $2,300 a share, up from around $1,600 now.”
The fund manager’s target price for Booking implies an upside of 31% from the market price of around $1,750 on July 17.
The travel industry is showing early signs of recovery
The fortunes of Booking Holdings depend entirely on the pace of the pandemic recovery and the willingness of travelers to explore the world amid the challenging conditions. A few countries are already embracing this new reality and setting up an example for other nations to follow.
|
Country/City |
The date on which borders were reopened for international travelers |
|
Barbados |
July 12 |
|
Bermuda |
July 1 |
|
Cyprus |
June 9 |
|
Egypt |
June 27 |
|
Germany |
June 15 |
|
Greece |
July 15 |
|
Dubai |
July 7 |
Source: Official government portals
Many of the nations listed in the above table are seeing promising travel industry results due to the implementation of several safety measures at the airports, hotels and tourist attractions in their respective countries. According to the United Nations, popular travel hubs around the world will likely follow suit, leading to a spectacular recovery of this business sector.
There are even some early signs of recovery in the United States. The Transportation Security Administration reported a total traveler throughput of 706,164 on July 16, which is a substantial improvement from the lows of around 90,000 seen in mid-April. A higher number of passengers passing through airport security checkpoints is good news for Booking Holdings as it’s a clear indication of personal and business travel starting to pick up.
The liquidity position
Similar to analyzing cruise line operators and many airlines, it would be futile to project revenue growth f
or Booking Holdings to determine an intrinsic value at this stage. It’s no secret that the company would be bringing in next to nothing in earnings until travel destinations start welcoming tourists once again, which could be a few months away even though there are some positive developments such as Greece and Dubai opening up their borders to revive the growth of the industry. The best course of action, therefore, is to evaluate the balance sheet strength of the company to identify whether Booking Holdings can remain solvent to see light at the end of the tunnel.
At the end of the first quarter, the company had a cash balance of over $7 billion and total liquidity of over $9 billion. At the time of holding its quarterly conference call on May 7, Booking Holdings was able to boost its cash position by over $5 billion as a result of a convertible note offering and a few other favorable developments. The company’s Chief Financial Officer, David Goulden, said:
“If you adjust our March 31 ending cash investment balance of $9.2 billion for our bond and convertible note offering and the settlement of the corporate bond sales and the refund of the Dutch tax prepayments, all of which occurred in April, on March 31, cash and investment balance will increase to about $14.3 billion. Approximately $12 billion of this is highly liquid after considering the actions we’ve taken, including recently completing the sale of our trip.com ADSs, moving on cash, and investments in corporate bonds into AAA treasury and government money market funds. After the bond and convertible offering, we have about $13 billion of debt, $4 billion of which matures before the end of 2022.”
The $4 billion of debt due to mature in 2022 is unlikely to be a burden on the company, assuming the travel industry will stage a comeback at least by mid-2021. To add some perspective, the company reported billions of dollars in free cash flow per annum over the last few years, which is an indication of its ability to service the debt due in two years even if travel activities will not pick up until the third or fourth quarters of 2021.
Source: GuruFocus
According to company filings, Booking Holdings repurchased $1.3 billion worth of its stock in the first quarter under the authorized share buyback plan. If the challenging business conditions extend beyond the projected time period, the company can avoid buybacks to save much-needed cash as well, even though it will be looked at as a negative development by some investors.
Overall, the liquidity profile of the company is promising, and the company is in a good position to either raise more capital or reduce its cash burn if needed.
The strengthening economic moat of the company
Competitive advantages, or moats, play an important role in helping a company earn economic profits for an extensive period. Booking Holdings is the number one player in the online travel reservations industry with a leading market share in North America and Europe. This number one position will help the company achieve above-average growth in the recovery phase, which would be in line with its performance in the last five years. This, on the other hand, will lead to an expansion in its valuation multiples.
The company caters to all travel needs through its subsidiaries, which makes Booking Holdings the go-to platform for consumers to plan their journeys by accounting for all aspects of their itinerary. This characteristic will continue to provide the company with an edge over its peers.
Source: Company presentation
The expected growth in online travel booking, the increasing smartphone penetration in many developing regions and the availability of internet access to a large share of the population are few other factors that will drive the industry forward in the future, and Booking Holdings is well-positioned to capture this growth.
Takeaway
Booking Holdings has what it takes to survive this economic recession, as it remains well funded. A bet against the company is a bet that the global travel industry will not recover at least in a couple of years, which seems highly unlikely to me.
Disclosure: I do not own any stocks mentioned in this article.
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This article first appeared on GuruFocus.
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