In Tollymore Investment Partners’ May 2019 Investor Letter, the fund disclosed its performance figures reporting an annualized return of 21% since inception. For more details about its returns and other updates you can download a copy of the letter here. Aside from reporting its returns, the fund also shared its views on several stocks in its portfolio, including TripAdvisor, Inc. (NASDAQ:TRIP).
“TripAdvisor (TRIP.US):We added modestly to our position in TRIP after 1Q19 results sent the stock down 11% to $49/share. Some of the news headlines that accompanied these results from the financial press included “Sales Declines Hit TripAdvisor”, “core hotel segment was flat, missing analyst expectations” and “TripAdvisor wasn’t able to deliver the top-line growth that many were counting on seeing”. We are not trying to predict share price movements; we are therefore not focused on analyst expectations nor trying to guess how our companies will do relative to them. It is also conceivable that management commentary on the call about softer than expected international demand, leading to a cautious Q2 revenue outlook may have also caused investors to sell their interest in this business as they extrapolate these demand fluctuations5. That was the trees.
How do we see the forest? We think the current level of profitability in the hotels business can be taken as a proxy for owner earnings6. TRIP’s reduction in performance marketing spend has driven large increases in profitability; the hotels segment recorded 41% EBITDA margins vs. 30% a year ago. Yet hotel revenues still increased slightly yoy.
Meanwhile restaurants and experiences revenue grew35% yoy7, but EBITDA losses widened to -$24mn from -$4mnas TRIP accelerated investments in adding bookable supply8, which continues to double yoy. This is the right move for a company concerned with enjoying the long-term barriers to entry of two-sided network effects. But it clearly dilutes short term profitability. Three quarters of c. $180bn9global experiences market is booked offline. A 5% share and 20% commission would imply sales of greater than TRIP’s current total revenues.Yet experiences and dining today are just 20% of TRIP’s revenues. Long term we think it is reasonable to assume that the dining and experiences segment can enjoy profit levels at least in line with the hotels business: the customer base is more fragmented; as such attractions earn higher commissions than hotel OTAs (c. 25%).
What kind of forest is priced into the share price today? TRIP expects to deliver double digit EBITDA growth in 2019. Let’s assume the business can generate $470mn of adjusted EBITDA10. This is 8% of the current $6bn enterprise value.TRIP generated c. $350mn of reported FCF over the last 12 months despite significant and accelerated investments in growing bookable supply in dining and experiences. If we assume that the hotels business is generating a proxy for owner earnings and normalise the profitability of experiences and dining to 40% EBITDA margins, this would add another c. $80mn to post-tax owner earnings. If we also capitalise the investments in TV advertising this would add a further $90mnafter tax = $520mn. These owner earnings are being generated on invested capital of less than $700mn, a 75% after-tax return, and a 9% yield into the cash-adjusted market cap. This implies an inability for TRIP to ever grow its earnings.
A high internal reinvestment rate is the right capital allocation priority for intrinsic value compounding. TRIP has been able to solve the chicken and egg problem associated with the development of strong platform business models by tapping into to its existing demand in hotel and connecting it to acquired or developed supply in non-hotel. For both restaurants and attractions, the number of reviewed items is multiples higher than the number of bookable items, and we expect low penetration rates of bookable inventory to provide a long volume growth runway.”
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TripAdvisor is a world popular travel and restaurant reviews platform, with a market cap of $6.54 billion. Year-to-date, its stock lost 13.32%, having a closing price on May 14th of $47.00. TripAdvisor is trading at a P/E ratio of 49.47.
Heading into the first quarter of 2019, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards TRIP over the last 14 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
Among these funds, Eagle Capital Management held the most valuable stake in Tripadvisor Inc (NASDAQ:TRIP), which was worth $495.9 million at the end of the third quarter. On the second spot was Bares Capital Management which amassed $282.9 million worth of shares. Moreover, D E Shaw, PAR Capital Management, and Renaissance Technologies were also bullish on Tripadvisor Inc (NASDAQ:TRIP), allocating a large percentage of their portfolios to this stock.
Disclosure: None.
This article is originally published at Insider Monkey.
