NEW YORK (TheStreet) - Ctrip.com International (CTRP) shares plunged Wednesday following the Shanghai-based online travel company's forecast that fourth-quarter revenue growth would slow and margins would be significantly lower due to spending on expanding operations.
The Chinese company warned on Tuesday in preliminary earnings results that it expects net revenue growth of 30% for the fourth quarter, which was below consensus expectations. Ctrip also issued margin guidance, warning of "a negative non-GAAP operating margin of -10% to -17%" for the fourth quarter, "before a recovery to positive territory" in 2015, according to Bank of America Merrill Lynch analyst Eddie Leung.
Shares were falling 9.4% to $52.96. Here's what analysts said.¿
Michael Olson, Piper Jaffray (Neutral; $49 PT)
Ctrip reported Q3 upside, but guided revenue slightly below consensus with margins for Q4 expected to decrease 3,500bps y/y as the company experiences further competitive pressure. Specifically, for Q4, revenue guidance of 30% growth is 200bps below the Street and PF op margin guidance of -12% to -17% is materially below our previous estimate of +14%. Management reiterated expectations of 20%-30% PF op margins long-term, but visibility on multi-year margin trajectory is low due to increasing competition. Furthermore, beyond Q4, the company suggested that Q1 PF op margin may be flattish q/q and 2015 PF op margin may be similar to 2014 (low to mid-single digits). While Ctrip has a leading position in a massive secular growth market, it is unclear when margin pressure will ease. Reit Neutral; PT to $49 (stock traded ~$55 after hours).
Eddie Leung, Bank of America Merrill Lynch (Neutral; $60 PO)
The margin pressure, directionally, should not be a surprise to most market participants, due to continuous industry competition and Ctrip's focus on growth. However, its approach is much more aggressive than expectations and the ramp in IT, promotion and business development costs is faster than our estimates. In light of expected losses in 4Q14E and 1Q15E, we lower our 2014E/15E EPS by 64%/97%, but see a much smaller reduction of 25% to 16E EPS, as we expect faster revenue CAGR of 39% in 13-16E (vs. 36% previously) to bring operating leverage. We lower our DCF-based PO by 19% to US$60, to factor in the margin downside yet faster growth, and our rating to Neutral, on less favorable risk/reward in the near term.
We see the upcoming losses as more a near-term event than a reflection of the company's long-term profit outlook, because 1) the timing of investing coincides with negative seasonality in the winter and spring quarters; 2) at least half of the increase in op expenses (up 23% QoQ in 4Q) are in product development and G&A, driven by headcount expansion, which should offer op leverage, as Ctrip continues to grow faster than the travel industry; 3) the company's approach is partly offensive, as it invests in IT and business development to drive expansion of its hotel network and newer businesses, such as mobile, ground transportation tickets, and booking of local tourist attractions. These investments should enhance its longer-term competitiveness. Upside risks include industry consolidation, while downside risks include escalation of the coupon war.
Vivian Hao, Deutsche Bank (Buy; $70 PT)
Management guides 4Q revenue growth of +30% YoY, above DBe/consensus by 3%, yet a bottom-line loss in 4Q, mainly attributable to the hefty investments in new initiatives. We expect the company's top-line strength to sustain whilst escalated margins pressure given continuing projects incubation as well as intensive promotional activities to fend off competition. Maintain Buy on unchanged LT secular thesis but expect some near term pressure on stock performance.
TheStreet Ratings team rates CTRIP.COM INTL LTD as a Hold with a ratings score of C+. TheStreet Ratings Team has this to say about their recommendation:
"We rate CTRIP.COM INTL LTD (CTRP) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, disappointing return on equity and feeble growth in the company's earnings per share."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 12.8%. Since the same quarter one year prior, revenues rose by 36.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Looking at where the stock is today compared to one year ago, we find that it is not only higher, but it has also clearly outperformed the rise in the S&P 500 over the same period, despite the company's weak earnings results. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
- The gross profit margin for CTRIP.COM INTL LTD is currently very high, coming in at 72.21%. Regardless of CTRP's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, CTRP's net profit margin of 7.83% compares favorably to the industry average.
- The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Internet & Catalog Retail industry. The net income has significantly decreased by 36.6% when compared to the same quarter one year ago, falling from $34.28 million to $21.74 million.
- The company's current return on equity has slightly decreased from the same quarter one year prior. This implies a minor weakness in the organization. When compared to other companies in the Internet & Catalog Retail industry and the overall market, CTRIP.COM INTL LTD's return on equity is below that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: CTRP Ratings Report
-Written by Laurie Kulikowski in New York.