Ctrip.com (CTRP) Gets Punished for Conservative Guidance

Prior to the 2008 Olympics in Beijing, Ctrip.com (CTRP: Charts, News) was a market darling, touted as the Orbitz (OWW: Charts, News) of China and a surefire way to capitalize on the travel needs of an increasing influx of mainland visitors.

However, the stock plunged to less than $10 per share after the Olympics, and its problems were exacerbated by the financial crises of 2008-2009, which erased all of the company's prior gains. Concerns that the company's explosive year-on-year growth was unsustainable, investors gave up on Ctrip, and shares have been on a steady decline since April. In November, the company posted strong third quarter earnings, but the market wasn't satisfied. Daily Chart
Ctrip posted earnings of $51 million, or 33 cents per share, on revenue of $162.9 million. Its earnings and revenue advanced 9% and 20%, respectively, on a year-on-year basis. Analysts had expected 31 cents per share on $150.9 million in revenue. While the company posted solid results for the quarter, its fourth quarter revenue guidance of $142.5 million to $148.7 million came in under the analysts' expectations of $148.9 million. This slight miss was enough to cause shares to slide over 14% on November 15. Analysts were also concerned about the murkiness of all its cost adjustments - especially the $8.5 million in government subsidies which were also included in its profits, equal to six cents per share. Without including these subsidies, Ctrip would have missed estimates by a wide margin. Ctrip is an all-purpose online travel agency based in Shanghai. The site is the most popular travel site in China, and offers plane tickets, hotel bookings and group tours, marketed to both business and leisure travelers. With the increased penetration of the Internet and smartphone usage, Ctrip is well poised to capitalize on the growing demand for fast, efficient online travel bookings. The company stated that revenue at all its business divisions increased, contributing to its 2% sequential increase in profits. Hotel reservation revenue increased 17% to $64 million, while air ticket booking revenue rose 22% to $60 million, due to higher sales volumes. Analysts believe that Ctrip's call center workforce of 6,500 is weighing on its margins, and the company has failed to invest properly in boosting sales and marketing expenses to pursue the more mainstream consumer travel market. The company's current gross margins declined a percentage point from 78% to 77% from the prior year quarter, while non-GAAP operating margin decreased from 45% to 41%. While Ctrip made an effort to increase its sales and marketing, these expenses have taken a toll on the bottom line - increasing from 14% to 17% of net revenues over the previous year. Due to these factors, some analysts believe that Ctrip's profit growth will be limited in the next quarter and beyond. In addition, the company's effective tax rate increased from 17% to 21% over the previous year. Looking forward, Ctrip is still well poised to dominate China's online travel market, but faces several serious economic headwinds. The former catalysts of the Olympics in 2008 and the World Expo in 2010 are now working against the company, as its growth prospects will be constantly measured against these prior lofty results. In addition, the Civil Aviation Administration of China cut its 2011 air passenger growth estimates from 13% to 8% by analyzing results from Air China, China Southern Airline (ZNH: Charts, News) and China Eastern Airline (CEA: Charts, News), signifying slow growth for the entire travel industry. Larger players such as Baidu are now vying for a piece of the online travel pie, while smaller rivals eLong (LONG: Charts, News) have been gaining ground. Ctrip might be able to hold its ground, but it may need to diversify into other fields to maintain cash flow for the next few quarters. For new investors, the stock has never been technically cheaper, trading at 20 times forward earnings - not bad for a previously hot Chinese stock that could still heat up again once the macro picture improves. Other News About CTRP Ctrip.com Profit Rises, Tops Estimates Ctrip posts strong numbers but guides weak, shares fall. Ctrip Reports Third Quarter 2011 Financial Results Ctrip's earnings in detail. Other Stocks in the News BofA expects $1.8-billion gain from stake in Chinese bank Bank of America cashes out in China, but is it sacrificing a long-term growth position for short-term capital? Warren Buffett is still not a tech geek Buffett bets big on IBM. Copyright 2011 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. 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Published on Dec 6, 2011
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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