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The stock market has had its ups and downs lately, but using the S&P 500 Index as proxy, the market is still just about 8% from its all-time high. Most of the household names are still hovering near record highs. With high expectations already baked into the U.S. market, for aggressive investors looking for stocks with high potential but still flying under the radar, it’s not a very easy task.
Sometimes, when the home market is showing signs of exhaustion, it’s time to look overseas for ideas.
For some time, we have been following a Latin American company. The stock only became publicly listed last September and barely has any analyst coverage in the U.S.
In Latin America, the company is well known. The name is Spanish for “to take off.” The company is sometimes referred to the “Latin Expedia.” Like Expedia, it is an online travel agency (OTA).
In addition, Expedia owns part of the company and the two companies have a close relationship. We would not be surprised to see Expedia eventually take it over in the future.
When we evaluate companies like this OTA, we usually look for four key traits: market disruptor, entrenched incumbent, sustainable balance sheet, and stealthy growth potential. The more “boxes” a company checks, the better. In this case, we think the company checks all four.
The company is changing the way people travel in Latin America. More and more travelers are now booking their trips online. This makes sense because OTAs allow side-by-side price comparisons for airfare, hotels, car rentals and other travel needs. In 2017, its websites saw 9.1 million transactions worth $4.45 billion. Not only that, more and more are booking their trips on mobile phones. By the end of 2017, customers were booking 30% of transactions through the company’s websites using mobile devices.
Although we Americans tend to think of “Latin America” as a group, within the region the countries have their respective own culture, language, currency, and laws. This can make international transactions difficult. The fact that this company can help make traveling bookings easy for the customer makes it valuable and likely to keep growing in popularity.
The company has no comparable homegrown competitor of similar size. Booking Holdings (formerly Priceline) and Expedia are its largest competitors. However, Booking and Expedia have global businesses whereas it is focused on travel within Latin America.
Although it did not become a publicly-traded company until 2017, the company has been in business since 1999. It knows the region. Its local expertise helps it efficiently connect customers across languages, countries, and currencies. The company offers customers a choice from more than 250 airlines, 300,000 hotels and 900 rental car agencies. That’s a lot of choices.
In the U.S. a few big names usually dominate the airline and hotel industries. The industries are much more fragmented in Latin America. This gives the businesses more incentive to increase awareness among potential customers by working with an OTA.
Sustainable Balance Sheet
The company currently has no debt and it ended 2017 with $371 million in cash and cash equivalents on hand so the balance sheet is in excellent shape.
Stealthy Growth Potential
Although the economic struggle of a country like Venezuela may give you a negative impression of Latin America, the region as a whole is growing. The World Bank estimates that between 2004 and 2014, the middle class in Latin American has increased from 25% of the population to 35%. Real GDP growth is expected to average 2.6% per year through 2021.
Rising income bodes well for an increase in travel spending. A growing number of people will become internet and credit card users. These are favorable trends for the company because as an online operator it can only accept electronic payments. By 2020, the Latin American online travel market is expected to grow to $48 billion, a rate of about 12.5% per year.
The company is strategically trying to grow its mobile presence and focusing on increasing its hotel bookings part of its business in order to grow its user base and improve profit margins. The latest quarterly results indicate that it’s gaining traction on both fronts. By gaining market share and improving profit margin, profits can grow at a pace faster than the general online travel market. We think EPS growth could average about 25% a year for the next several years.
We think it has excellent potential upside but because it’s a relatively newly listed foreign stock and it doesn’t yet have much of a following among Wall Street analysts, the share price is prone to big moves up and down. It’s not for the faint of heart. We think it’s a stock fit for patient investors looking for market-beating returns for the long term as we explain here.
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