Priceline and Ctrip Investment Analysis to Evaluate Travel Acquisitions and Optimize Capital Allocation
- 1. Page 1Travel industry financial, risk and decision analysis in uncertain economiesUsing multiple regression series focused on travel company valuations such as Pricelines and Ctrips to evaluate travel technology and online agency acquisitions in China
- 2. Page 2Travel industry financial, risk and decision analysis in uncertain economiesThe analysis here was designed to help plan critical acquisition and strategic decisions focused on maximizing investor returns toInform decisions to acquire several travel technology companies in a risky China market1Drive capital allocation and shareholder return by using multiple regression analysis to understand how investors assign pricing multiples and value industries2Drive business decisions, such as whether to invest in a sales sub-agent network in southern China or invest to relocate call centers from Hong Kong to Guangzhou3Account for risks such as foreign currency policy shifts and potential impacts of recession4
- 3. Page 3Travel industry financial, risk and decision analysis in uncertain economiesThis high-impact approach is based on the fact that any change in P-R or P-E multiples drives the stock price and creates or destroys shareholder value. Understanding how investors assign pricing multiples to different segments in an industry can help drive capital allocation decisions and shareholder returns.As just one practical example, a firm might invest $10 Million in a revenue-driving promotional campaign rather than cut staff to save costs, depending on how investors weigh revenue growth vs. EPS volatility.Investor returns driven by:companies invest to increase sales and profitsbut slight changes in multiples impact market values dramaticallyIndustry valuation drivers are often defined too broadly as growth or profitand companies may miss opportunity to influence increases in the multiples
- 4. Page 4Looking at Priceline and Ctrip pricing multiples to set stageInvestors often prioritize different metrics in different segments within the same industry, such as online vs offline travel agencies and legacy vs low-cost airlinesSample variables and weightings
- 5. Page 5Looking at Priceline and Ctrip pricing multiples to set stagePriceline case how should it allocate capital over time?The collapse of 2008 and 2009 drove another dip. Key questions include whether Priceline could do anything about its own valuation, as in post-9/11, and whether actions such as excessive job cuts would even impact shareholder value.China Online Travel Agency case Ctrip why is it getting astronomical valuations?Trading at an extraordinary P-E of up to 90x in Chinas hot economy in 2006 and 2007, one might assume CTRPs valuation was driven by high revenue growth expectations, dominant market share over eLong, or increasing earnings
- 6. Page 6Looking at Priceline and Ctrip pricing multiples to set stageMultiple regression series identify correlations between multiples and 30+ economic, financial, and operating metricsand the regression equation isolates and quantifies the impact of the significant factorsFor example, the equation calculating Pricelines P-R multiple from 2005 2007 matched the actual multiple very closely: P-R = 18 (40 * OTA share) + (15 * 1st Std-dev T4Q Revenue) (2 * Revenue growth)
- 7. Page 7Looking at Priceline and Ctrip pricing multiples to set stagePriceline case how should it allocate capital over time?In a bad US economy after 9/11, the only forces correlated to Pricelines P-R were the NASDAQ and US internet penetration. Key growth and volatility-oriented metrics phased in from 2004 to 2007, but investors did not reward Priceline until OTA market share became a significant factor after Priceline acquired Booking.com in Europe. Todays economy could be similar to post-9-11 as valuations correlate to macro-indicators more than actual performanceSlow recoveryMaturationand a force again?Start-up, dot-com crash, lead-in to 9-112008 economypost-9/11Pricelines P-R significantly correlated only to: US internet penetration
- 9. ROIC and EPS
- 10. 1 Std-dev T4Q Rev
- 12. NASDAQ Index
- 15. 1 Std-dev T4Q EPS
- 16. Season-adj Op margin %
- 17. OTA market share
- 19. 1 Std-dev T4Q rev
- 20. Variables data incompletePage 8Looking at Priceline and Ctrip pricing multiples to set stageChina Online Travel Agency case Ctrip why is it getting astronomical valuations?Trading at an extraordinary P-E of up to 90x in Chinas hot economy in 2006 and 2007, one might assume CTRPs valuation was driven by high revenue growth expectations, dominant market share over eLong, or increasing earningsHowever, CTRPs P-E correlated to only one variable in 2006 and 2007:Chinese Internet PenetrationWhich is even more interesting considering 80% of Ctrips hotel bookings occur via call center, not onlineShould investors keep buying it? And how should Ctrip invest capital to meet these expectations?
- 21. Page 9Looking at Priceline and Ctrip pricing multiples to set stageIts not possible to truly predict behavior, but anticipating patterns can help direct capital where it may likely be rewarded over time.For example, a firm might need to choose whether to invest $5 Million to expand a sales network in Southern China or $5 Million to save labor costs by relocating call centers from Hong Kong to Guangzhou. PEEarnings gain or cost savings Valuation gain AssumptionsProject choiceRevenue growth is a primary factor, and a growth pattern drives an PE increase from 15x to 20x
- 22. Labor cost savings are helpful, but operating margin is not correlated or rewarded additionally