One of Wall Street's biggest winners of the day is Trip.com, a business services company whose shares have climbed 5.7% to a price of $38.44 -- 24.46% below its average analyst target price of $50.88.
The average analyst rating for the stock is buy. TCOM may have outstripped the S&P 500 index by 6.0% so far today, but it has lagged behind the index by 28.6% over the last year, returning -5.0%.
Trip.com Group Limited operates as a travel service provider for accommodation reservation, transportation ticketing, packaged tours and in-destination, corporate travel management, and other travel-related services in China and internationally. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.
Trip.com's trailing 12 month P/E ratio is 28.5, based on its trailing EPS of $1.35. The company has a forward P/E ratio of 16.0 according to its forward EPS of $2.4 -- which is an estimate of what its earnings will look like in the next quarter.
As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.96, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
TCOM’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Trip.com, we obtain a PEG ratio of 6.1, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To better understand the strength of Trip.com's business, we can analyse its operating margins, which are its revenues minus its operating costs. Consistently strong margins backed by a positive trend can signal that a company is on track to deliver returns for its shareholders. Here's the operating margin statistics for the last four years:
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022 | 2,907,000 | 2,238,000 | 1 | 114.29 |
| 2021 | 3,142,000 | 2,642,000 | -7 | 12.5 |
| 2020 | 2,807,000 | 2,407,000 | -8 | -157.14 |
| 2019 | 5,122,000 | 3,340,000 | 14 | 75.0 |
| 2018 | 4,524,000 | 3,205,000 | 8 | -27.27 |
| 2017 | 4,146,287 | 2,947,182 | 11 |
- Average operating margins: 3.2 %
- Average operating margins growth rate: -39.9 %
- Coefficient of variability (lower numbers indicate less volatility): 3320.29 %
Trip.com's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022 | 380,000 | 72,000 | 308,000 | 3.01 |
| 2021 | 388,000 | 89,000 | 299,000 | 144.69 |
| 2020 | -588,000 | 81,000 | -669,000 | -171.4 |
| 2019 | 1,055,000 | 118,000 | 937,000 | -0.11 |
| 2018 | 1,036,000 | 98,000 | 938,000 | -7.5 |
| 2017 | 1,086,464 | 72,410 | 1,014,054 |
- Average free cash flow: $471.18 Million
- Average free cash flown growth rate: -20.8 %
- Coefficient of variability (lower numbers indicating more stability): 2146.42 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, TCOM is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Trip.com's P/B ratio of 0.2 indicates that the market value of the company is less than the value of its assets -- a potential indicator of an undervalued stock. The average P/B ratio of the Consumer Discretionary sector was 4.24 as of the first quarter of 2023.
With an inflated P/E ratio, an exceptionally low P/B ratio, and irregular cash flows with a downwards trend, we can conclude that Trip.com is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a negative growth trend, and an inflated PEG ratio.
