Will Ctrip’s Stock Help You Book Gains?

With shares of Ctrip.com International Ltd. (NASDAQ:CTRP) trading at around $20.73, is CTRP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Investors are responding in positive fashion to Ctrip’s earnings results. Q4 revenue came in at $177 million, which was a 1 percent increase year-over-year. Diluted EPS was $0.22 versus $0.27 for the same quarter last year. Gross Margin was 74 percent versus 76 percent for the same quarter last year. Operating Margin was 11 percent versus 25 percent for the same quarter last year. Income from operations was down 48 percent year-over-year. So far, this doesn’t look like the kind of report that would send a stock 5 percent higher. Let’s keep looking.

FY2012 revenue was $668 million, which was a 19 percent increase over 2011. Diluted EPS was $0.80 versus $1.12 in 2011. FY2012 Gross Margin was 75 percent versus 77 percent for 2011. Operating Margin was 16 percent versus 30 percent in 2011. Income from operations was down 39 percent compared to 2011. The only bright spot here is revenue, which should be the most important factor, but it’s still not the kind of report to move a stock 5 percent higher.

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The answer, of course, is strong guidance. Ctrip expects strong revenue growth at a year-on-year rate of 15.20 percent. Other comments made by management were vague. In summation, Ctrip has enhanced its leadership in the online travel market for China, and the company will continue to invest in customer services, product offerings, brand recognition, and technology development.

Let’s take a look at some important numbers prior to forming an opinion on the stock…

E = Equity to Debt Ratio Is Normal  

The debt-to-equity ratio and balance sheet for Ctrip are both strong.

Debt-To-Equity

Cash

Long-Term Debt

CTRP

0.35

$859.34 Million

$180.00 Million

HTHT

0.00

$83.87 Million

$0

EXPE

0.51

$2.38 Billion

$1.25 Billion

 

T = Technicals on the Stock Chart Are Poor  

Ctrip has underperformed China Lodging Group (NASDAQ:HTHT) and Expedia.com (NASDAQ:EXPE) over the past three years. More importantly, the stock has performed poorly in a bull market. This is often an ominous sign. However, the stock has performed well over the past six months, which you can’t tell from the numbers below.

1 Month

Year-To-Date

1 Year

3 Year

CTRP

-12.58%

-12.58%

-20.92%

-36.69%

HTHT

6.80%

6.80%

21.00%

-0.05%

EXPE

6.14%

6.14%

105.10%

215.20%

 

At $20.73, Ctrip is trading below its 50-day SMA, and above its 100-day and 200-day SMA.   

50-Day SMA

21.21

100-Day SMA

19.81

200-Day SMA

18.49

 

E = Earnings and Revenue Have Been Consistent       

Earnings and revenue have improved every year since 2007 (other than 2012 EPS, which was covered in Catalyst section.) This is rare. However, some investors don’t trust Chinese companies when it comes to financial reports.

2007

2008

2009

2010

2011

Revenue ($)in millions

164.38

217.22

291.24

436.55

555.79

Diluted EPS ($)

0.40

0.48

0.68

1.06

1.12

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

162.94

156.75

153.01

162.28

198.47

Diluted EPS ($)

0.33

0.27

0.18

0.13

0.22

 

T = Trends Might Support the Industry

This is a consumer-sensitive company operating in China. China has clearly stimulated to get the economic engine running again. The interesting thing about economic stimulus measures is that they only work for a limited period of time. If stimulus is required, then there is obviously something wrong with the economic system on an organic level. Therefore, the long-term trend is poor. That said, economic stimulus measures can have a profound effect for a significant period of time before reality sets in.

This doesn’t seem like a time where the average working person in China would be planning a vacation, but Ctrip has offered a strong outlook.

Conclusion

Revenue growth is consistent, the balance sheet is in good condition, and guidance is strong. However, margins are weakening, and in a macro sense, the stock has performed poorly in a bull market. For a six-month time frame, that trend has changed, and in a big way. If this earnings report can get the stock back on track, then the upward trend can continue. Ctrip looks like a solid trend trade with a trailing stop, but not a quality long-term investment. For the moment, Ctrip is an OUTPERFORM.

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