Online Travel Agencies Booking And Expedia Look Cheap Right Now

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When the COVID-19 pandemic grounded planes and shuttered hotels around the world, the travel industry was instantly in dire straits. However, the sector has come roaring back between pent-up demand for travel and the resumption of everyday activities, creating ample opportunities for online travel agencies.

Despite the earnings strength of companies like Booking Holdings Inc (NASDAQ:BKNG) and Expedia Group Inc (NASDAQ:EXPE), stock prices remain weak, potentially creating attractive entry points.

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Q2 2022 hedge fund letters, conferences and more


Recovery In The Travel Industry

The United Nations World Tourism Organization (UNWTO) recorded nearly 250 million international arrivals during the first five months of 2022, compared to 77 million in the first five months of 2021. These numbers show the travel industry has recovered nearly half of its pre-pandemic levels, meaning there is a significant runway for growth.

Meanwhile, Booking has surpassed where it stood before the pandemic, reporting 213 million room nights for the second quarter of 2019 and 246 million nights in the second quarter of 2022. Since the travel industry still has lots of room for recovery, this suggests that Booking is poised for significant growth in the coming years.

Booking gets most of its business in Europe, and the continent remains in recovery mode. In fact, the European Travel Commission estimates that Europe will recover 70% of its pre-pandemic travel demand in 2022. Booking's larger exposure to Europe also suggests that sizable growth is likely in the next few years.

Booking, Expedia Benefit From The Regional Recovery

Booking has been a favorite position among hedge funds, according to recent 13F filings. Regulatory filings have shown that Expedia has also been a hedge fund favorite. Together, these two online travel agencies offer exposure to Europe and the U.S., which the UNWTO has found to be leading the recovery in travel.

The agency found that in 2022, Europe had more than four times as many international arrivals versus in the first five months of 2021. Meanwhile, arrivals in the Americas more than doubled year over year, showcasing the region's contributions to the travel industry's recovery.

However, other parts of the world are contributing to the recovery as well. Arrivals in the Middle East were up 157% from 2021, while arrivals in Africa rose 156% year over year, although the two regions remained 54% and 50% below their 2019 levels, respectively.

Arrivals in Asia and the Pacific region nearly doubled in 2022 but remained 90% below their pre-pandemic levels due to continuing closures of some borders to non-essential travel.

Tourism Spending Also On The Rise

The numbers also show that travelers are spending more money on their trips, which gives online travel agencies like Booking and Expedia a further boost.

The UNWTO detected growing tourism spending from the major source markets, which has brought international expenditures by tourists from France, Germany, Italy and the U.S. to 70% to 85% of pre-pandemic levels. Meanwhile, spending from travelers from India, Saudi Arabia and Qatar has already surpassed 2019 levels.

The growing spending on tourism and rapidly increasing numbers of arrivals are interesting in light of this year's skyrocketing inflation around the globe. The growth in Europe is also surprising due to the tensions caused by Russia's invasion of Ukraine.

It seems that the pent-up demand is more than offsetting any such concerns, although much of the growth is in shorter trips rather than long-haul travel.

Booking And Expedia

While Booking is primarily exposed to Europe, Expedia gets most of its business from the U.S. However, even though they don't necessarily compete with each other much, Booking has recovered from the pandemic much faster than Expedia.

Booking is also much larger than Expedia, prompting one hedge fund manager to say that he likes both Expedia and Booking, but if Booking didn't exist, Expedia would be one of the best companies in the world.

In the second quarter of 2022, Booking reported adjusted earnings of $21.07 per diluted share and $21.15 per basic share on $4.3 billion in revenue, compared to the year-ago numbers of a net loss of $4.08 per basic and diluted shares on $2.16 billion in revenue.

Of note, Booking was profitable for all of 2021. Additionally, the company's balance sheet looks better than Expedia's, with $11.13 billion in cash and equivalents and $6.25 billion in current liabilities and $11.4 billion in total debt.

Expedia reported adjusted earnings of $1.96 per share on $3.2 billion in revenue for the second quarter, although it lost money in the first quarter. The company was just barely in the green for 2021 following its steep loss of $2.7 billion in 2020.

As far as valuation goes, Expedia looks cheaper than Booking, with its P/E of about 13 times versus Booking's at around 17.55 times. However, Booking's faster recovery and larger earnings numbers reveal that a premium is warranted, and both companies look cheap relative to their historical P/Es.