As the coronavirus spreads globally, the travel and tourism industry is among the worst hit. It’s not surprising that Booking Holdings (NASDAQ:BKNG) has declined by 40% from 52-week highs of $2094. While I am not ruling out a sharp technical bounce back from technically oversold levels, I believe that BKNG stock has more downside in the coming months.
At the onset, it’s worth mentioning that Booking Holdings has already withdrawn its first-quarter guidance for fiscal year 2020. There is a difference between revising the guidance and withdrawing. The latter implies absolute uncertainty on financial results and there is no doubt that there will be a major negative surprise. It therefore makes sense to wait for more clarity.
This uncertainty is also voiced by Peter Conti-Brown, Wharton professor of legal studies and business ethics: “We don’t see once-a-decade or once-a-generation a screeching halt to all macroeconomic activity, and we don’t know what will come from this.”
The Tourism Industry and BKNG Stock
The impact of COVID-19 on the tourism industry is likely to be severe and sustained. The World Economic Forum opines that “once the outbreak is over, it could take up to 10 months for the industry to recover.”
As a ball-park estimate, the recovery for the tourism industry can happen well into FY2021. Therefore, Booking Holdings is likely to face at least six to eight quarters of this weak tourism trend. I am not sure if the stock has discounted a deep downturn for the industry.
To put things into perspective, the company reported earnings per share of $112.93 for the last year. At a current stock price of $1254, it implies a price-to-earning-ratio of 11.1.
However, it would not be surprising if the current year EPS declines by 50%. Therefore, at a ball-park EPS estimate of $56.5, BKNG stock is trading at a P/E of 22.2. Clearly, valuations still look stretched for an industry that has uncertain times ahead.
Coming back to the impact, the World Tourism Organization estimates a loss of $30 to $50 billion in international tourism receipts. The organization has underscored the point that the estimated has to be treated with caution. In other words, these are just early estimates. Considering the current COVID-19 scenario in the U.S. and Europe, the industry pain will aggravate.
The key takeaway is that it might just be too early to buy Booking Holdings. Not just Q1 2020, the coming few quarters will deliver extremely weak results.
Strong Fundamentals Will Help Navigate Challenging Times
An important point from the company’s latest annual report is as follows –
The majority of our gross bookings are generated in the first half of the year, as consumers plan and reserve their spring and summer vacations in Europe and North America.
Therefore, it’s optimistic to assume a recovery in the company’s results in the second half of the year. Further, travelers will be cautious even into FY2021. Overall, the above statement on bookings generated in the first half of the year implies that the company will face two years of downturn.
While this factor will be discounted in the stock in the coming quarters, I am not worried from a balance sheet perspective. The company has ample cash buffer to survive the crisis.
As of December 2019, the company reported $11.8 billion in cash, short-term and long-term investments. This buffer will help the company navigate the downturn.
I must add here that for FY2019, Booking Holdings repurchased shares worth $8.2 billion. Given the current scenario, I don’t expect any share repurchase for the next 24-to-36-months.
My Concluding Thoughts on BKNG Stock
The tourism industry is among the worst-hit due to the coronavirus pandemic. Booking Holdings will feel the impact for a sustained period, and I see the stock trending lower in the coming quarters.
However, the company has strong fundamentals and the focus will be on conserving cash and cost-cutting in the coming quarters. Therefore, it makes sense to avoid BKNG stock amidst uncertainties.
Another 30% to 40% downside from current levels can make the stock attractive for long-term exposure.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.