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Page 1<br />Travel industry financial, risk and decision analysis in uncertain economies<br />Using multiple regression se...
Page 2<br />Travel industry financial, risk and decision analysis in uncertain economies<br />The analysis here was design...
Page 3<br />Travel industry financial, risk and decision analysis in uncertain economies<br />This high-impact approach is...
Page 4<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />Investors often prioritize different metric...
Page 5<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />Priceline case – how should it allocate cap...
Page 6<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />Multiple regression series identify correla...
Page 7<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />Priceline case – how should it allocate cap...
Season-adj Rev growth
ROIC and EPS
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Priceline and Ctrip Investment Analysis to Evaluate Travel Acquisitions and Optimize Capital Allocation

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Using multiple regression series focused on travel company valuations such as Priceline’s and Ctrip’s to evaluate travel technology and online agency acquisitions in China

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Priceline and Ctrip Investment Analysis to Evaluate Travel Acquisitions and Optimize Capital Allocation

  1. 1. Page 1<br />Travel industry financial, risk and decision analysis in uncertain economies<br />Using multiple regression series focused on travel company valuations such as Priceline’s and Ctrip’s to evaluate travel technology and online agency acquisitions in China<br />
  2. 2. Page 2<br />Travel industry financial, risk and decision analysis in uncertain economies<br />The analysis here was designed to help plan critical acquisition and strategic decisions focused on maximizing investor returns to<br />Inform decisions to acquire several travel technology companies in a risky China market<br />1<br />Drive capital allocation and shareholder return by using multiple regression analysis to understand how investors assign pricing multiples and value industries<br />2<br />Drive 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 Guangzhou<br />3<br />Account for risks such as foreign currency policy shifts and potential impacts of recession<br />4<br />
  3. 3. Page 3<br />Travel industry financial, risk and decision analysis in uncertain economies<br />This 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. <br />Understanding how investors assign pricing multiples to different segments in an industry can help drive capital allocation decisions and shareholder returns.<br />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.<br />Investor returns driven by:<br />companies invest to increase sales and profits…<br />…but slight changes in multiples impact market values dramatically<br />Industry valuation drivers are often defined too broadly as “growth” or “profit”…<br />…and companies may miss opportunity to influence increases in the multiples<br />
  4. 4. Page 4<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />Investors often prioritize different metrics in different segments within the same industry, such as online vs offline travel agencies and legacy vs low-cost airlines<br />Sample variables and weightings<br />
  5. 5. Page 5<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />Priceline case – how should it allocate capital over time?<br />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.<br />China Online Travel Agency case – Ctrip – why is it getting astronomical valuations?<br />Trading at an extraordinary P-E of up to 90x in China’s hot economy in 2006 and 2007, one might assume CTRP’s valuation was driven by high revenue growth expectations, dominant market share over eLong, or increasing earnings…<br />
  6. 6. Page 6<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />Multiple regression series identify correlations between multiples and 30+ economic, financial, and operating metrics…<br />…and the regression equation isolates and quantifies the impact of the significant factors<br />For example, the equation calculating Priceline’s P-R multiple from 2005 – 2007 matched the actual multiple very closely:<br /> P-R = 18 – (40 * OTA share) + (15 * 1st Std-dev T4Q Revenue) – (2 * Revenue growth)<br />
  7. 7. Page 7<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />Priceline case – how should it allocate capital over time?<br />In a bad US economy after 9/11, the only forces correlated to Priceline’s 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. <br />Today’s economy could be similar to post-9-11 as valuations correlate to macro-indicators more than actual performance<br />Slow recovery<br />Maturation…and a force again?<br />Start-up, dot-com crash, lead-in to 9-11<br />2008 economy<br />post-9/11<br />Priceline’s P-R significantly correlated only to: <br /><ul><li>US internet penetration
  8. 8. Season-adj Rev growth
  9. 9. ROIC and EPS
  10. 10. 1 Std-dev T4Q Rev
  11. 11. Operating margin %
  12. 12. NASDAQ Index
  13. 13. US internet penetration
  14. 14. Season-adj Rev growth
  15. 15. 1 Std-dev T4Q EPS
  16. 16. Season-adj Op margin %
  17. 17. OTA market share
  18. 18. Season-adj Rev growth
  19. 19. 1 Std-dev T4Q rev
  20. 20. Variables data incomplete</li></li></ul><li>Page 8<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />China Online Travel Agency case – Ctrip – why is it getting astronomical valuations?<br />Trading at an extraordinary P-E of up to 90x in China’s hot economy in 2006 and 2007, one might assume CTRP’s valuation was driven by high revenue growth expectations, dominant market share over eLong, or increasing earnings…<br />However, CTRP’s P-E correlated to only one variable in 2006 and 2007:<br />Chinese Internet Penetration<br />Which is even more interesting considering 80% of Ctrip’s hotel bookings occur via call center, not online…<br />Should investors keep buying it? And how should Ctrip invest capital to meet these expectations?<br />
  21. 21. Page 9<br />Looking at Priceline and Ctrip pricing multiples to set stage<br />It’s not possible to truly predict behavior, but anticipating patterns can help direct capital where it may likely be rewarded over time.<br />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. <br />PE<br />Earnings gain or cost savings <br />Valuation gain <br />Assumptions<br />Project choice<br /><ul><li>Revenue growth is a primary factor, and a growth pattern drives an PE increase from 15x to 20x
  22. 22. Labor cost savings are helpful, but operating margin is not correlated or rewarded additionally</li>

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