Hello guys,
I have an interview with a top BB for their investment research division. I will likely be asked to pitch a stock. I would like to pitch CTRIP and have a strong reason for it on a marco/market share level but have one issue I am not sure how to overcome.
The stock is overpriced on a comparable analysis level in terms of P/E. Can someone help/guide in pitching a stock which is trading beyond its competitors (e.g. Expedia, Priceline....). I am really lost here...
EDIT: which multiples should I be looking at for this company? is EV/sales a good metric? if so, why?
EDIT: For reference, CTRP's P/E is 1063.51, while the current market P/E is 19.00.
Thanks
A P/E ratio of 1,063 means that this ratio is worthless for analyzing the stock. Now, this may be a result of 2 major reasons: 1) LTM Net Income was influenced by an "unusual" loss. In this case, you need to compute the "normalized" or "representative" Net Income and recalculate the P/E. 2) LTM Net Income is very low and does not represent the potential earnings of the company, maybe due to very high expected growth.
To be honest, I am not familiar with CTRIP at all, and with Expedia/Priceline only by their service. A brief look at CTRIP financials shows that the company experiences a very high rate of growth in revenues in recent years, much higher compared to Expedia and Priceline. You can assume that in the long term, those companies can reach a similar operating margin, so looking at the EV/Sales ratio might be a good metric. The problem is, at the moment, the EV/Sales of CTRIP is also higher compared to the two peers. It seems that the best way for you to defend the market price is the high growth rate and the market potential, compared to Expedia and Priceline.
Thank you for your reply.
Hello, Quick Q. I have managed to find a Macquire Equity Research Report which stated forecastings in increased EBITDA margins. Do you think it would be bad to mention in an interview that I have read an analyst report of increased EBITDA margins or instead state that the firm is expected to have increased EBITDA margins to 20-25% as stated by their management? ( read it somewhere, can't remember where)
I think if you could build the earning forecast model yourself and sort out the logic behind this increased EBITDA margins then it's fair to use. Otherwise you'll always be asked about the rationale behind the increased EBITDA during the interview anyway.
I agree with Alex, you will always be asked about the rationale of your projections- that's what the interviewers want to understand, how you think. Lucky for you, the issue of the margins increase is heavily discussed in the latest earnings call, which can be easily viewed in Seeking Alpha: https://seekingalpha.com/symbol/CTRP/earnings/transcripts Read the transcript of the Q1 2017 earnings call, it will help you a lot in the interview and will show that you're up to date with the company news.
Ok so I agree with the last sentence here. But everything else is suspect.
This is a stock that has to be justified on excessive revenue growth. You have to describe how and why 4B in revenue this year doubles in a few years, driving EBITDA to 1.5B-2B and to a comparable multiple to PCLN (at 2B+).
I think that this will be tough to do for many US-based equity managers. I don't see the upward revision trends that would suggest such out-sized growth.
What else drives upside? Could they be bought (seems possible)? Are there underappreciated partnerships?
I guess I would say what are your market share/macros reasons? Don't tell me the fucking Chinese middle class without details.
EV/sales is not a good metric. We don't look to PCLN/EXPE for these metrics. People are using EV/sales for software companies. Good luck with how that ends up.
I was going to talk about the growth of the travel sector in China. Domestic travel is going to be the largest in China by c2020 overtaking America. In addition to this with the recent acquisition of its rival Qunar at the end of 2015 it has a majority market ( can't remember the exact figure but it is about 80%). I also have a few points for increasing EBITDA but again talking about revenue growth I was going to mention how it acquired a 26.6% stake in Indias leading OTA. Then make a comment how Indias market is comparable to Chinas 10 years ago. I will have a few statistics to back this up.
I also think their partnership is undervalued. CTRIP stated its focus is domestic travel in China and is now focusing on tier-2 cities but looking at international expansion is a certainty. With this, its partnership with Priceline will be more valuable.
Points on EBITDA margin increasing were going to be made about reductions in one-off stock-based compensation due to the acquisition of QUNAR. Skyscanner acquisition resulting in a 1.5% increase in gross margin ( as stated in a Q1 call) and a few other things.
Do you think these are some good points or still a little shallow? My point was going to be on a comparable analysis it is overvalued but there really aren't truly comparable companies due to the different life cycles in the travel and tourism industry in these regions.
Please let me know your thoughts. My interview is not for an equity research position but for an off-cycle equity strategy internship if that helps in terms of how detailed I need to be.
Hey thanks for your comment about being brought. Do you think this would make a good story for being brought? Priceline owns part of CTRIP i think c10%, I need to check. Priceline and others are focused more on the global market instead of China and more specifically greater China. Then try to make a point from this? I need to look into it further.
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