Thursday, June 21, 2012

How Low Can Ctrip.com International Go?

Shares of Ctrip.com International (Nasdaq: CTRP  ) hit a 52-week low on Monday. Let's take a look at how it got there and see whether cloudy skies remain in the forecast.

How it got here
In the online travel booking industry, there's priceline.com (Nasdaq: PCLN  ) and everybody else. With little margin for error in this comparison, Ctrip's most recent earnings report is the primary culprit in its drop. Though shares initially popped after the announcement last month, the stock fell to a 52-week low shortly thereafter as investors further digested the earnings report.

For the quarter, China's largest online travel booking site saw revenue rise 19% to $145 million with net income dropping 28% to just $0.18 per share. Eating into the company's bottom line was a mixture of stock-based compensation (a nasty habit that has caused many China-based companies to miss earnings recently), a 57% rise in general and administrative expenses, and lower realized commissions on both air and hotel bookings despite the increased volumes. This raises many questions, the main one being, "What if Ctrip is losing its pricing power?"

Still, there are reasons to be positive regarding its outlook. The majority of leisure companies that have reported earnings have stated that hotel booking RevPAR -- or revenue �per available room -- and travel demand remains strong globally. Marriott International (NYSE: MAR  ) is one such company that serves as a daily reminder that people are still spending, as it forecast RevPAR growth of 6% to 8% in its most recent quarter. In addition, Ctrip has the advantage of being the largest online travel site in the most populated country in the world. It's still in its growth infancy.

How it stacks up
Let's see how Ctrip.com International compares to its peers.

CTRP data by YCharts.

As you can see, Priceline and Expedia (Nasdaq: EXPE  ) have managed to outperform Ctrip and India's MakeMyTrip (Nasdaq: MMYT  ) by a mile. With the latter two in heavily populated countries, growth hiccups seem almost unforgivable to investors.

Company

Price/Book

Price/Cash Flow

Forward P/E

5-Year Revenue CAGR

Ctrip.com International 2.2 9.2 16.0 33.2%
Priceline 11.8 25.3 15.5 31.1%
Expedia 2.8 5.3 13.7 9.0%
MakeMyTrip 4.4 151.7 43.9 34.6%*

Sources: Morningstar and author's calculations. * = denotes two-year CAGR.

Now here's where things get a little bit tricky, because each stock listed above has strengths and weaknesses.

Expedia's costly international expansion came at the expense of a moderate growth rate over the past few years, but it is clearly the cheapest and one of the strongest names poised for future growth.

Conversely, Priceline is much more expensive than its U.S. rival Expedia based on these metrics, but it also has the advantage of having its foot in the international markets for a longer period of time than Expedia. Overall, I consider Expedia a much better value between the two.

MakeMyTrip is still a relatively new company. Currently, its growth rates are enormous and the potential for gaining a huge following in India still exists. However, costs are going through the roof and the company is only marginally cash flow positive at best.

Finally, there's Ctrip, which offers a nice blend of growth and value that combines a little bit of what I see from Priceline and Expedia. Although Ctrip is taking advantage of the Chinese economy's projected 7.5% GDP growth, its pricing power is now in serious question after its booking commissions fell.

What's next
Now for the $64,000 question: What's next for Ctrip.com International? The answer is really going to depend on whether it can control its costs, but more important, whether it can generate higher booking commission.

Our very own CAPS community gives the company a three-star rating (out of five), with an overwhelming 95.6% of members expecting it to outperform. I have yet to personally make a CAPScall on Ctrip.com, as I'm still undecided on whether this is a two-or-three-quarter hiccup, or a bearish new trend in booking commissions.

Clearly Ctrip.com has demonstrated amazing growth and the huge number of potential customers in Asia gives the company a wide audience to target. It's just breaking the tip of the iceberg of what it's capable of. However, a surge in stock-based compensation and expenses has me concerned that shareholders are once again not coming first. I understand the need to expand promotions, but when I don't see that translated into rising air and hotel booking commissions, I get concerned. For now I'm going to hover in wait-and-see mode and revisit Ctrip in three to six months.

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