investment club - notre dame sitessites.nd.edu/invclub/files/2017/09/ndic-meeting-10.26.17.pdf ·...

Investment Club Fall 2017

President – Sarah Graney (sgraney@nd.edu)Vice President – Devon Krapcho (dkrapcho@nd.edu)Board Member – Alyssa Loffredo (aloffred@nd.edu)Board Member – Rafa Campos (rphilipp@nd.edu)Board Member – Niko Martinovic (nmarti10@nd.edu)Treasurer – Christian Brunner-Lopez (cbrunner@nd.edu)Secretary – Alex Kruszewski (akrusze1@nd.edu)Mentorship Director – Steve Nash (snash2@nd.edu)Mentorship Director – Carl Schiro (cschiro@nd.edu)Website Coordinator – Lauren Weetman (lweetman@nd.edu)

Attendance

Let us know you’re here!

https://goo.gl/forms/MysyMNTtLnG9fiL22

2

Agenda

▸ Workshop

▸ Market & Portfolio Update

▸ Pitch

▸ Announcements

3

WORKSHOP

4

Introduction*to*Global*Macro

Perry*ParkerOctober*26th,*2017

ND Investment Club

Who$Am$I

Hometown:)Sumrall,$Mississippi$– A$farming$townPopulation:+1,005Sumrall+High+School:+2014+and+2015+HS+baseball+national+champions

ND Investment Club

My$PathUniversity)of)Southern)Mississippi)– 1985)

University)of)Chicago)MBA)– 1989

Goldman)Sachs)– 1987E1995Vice+President+– FX+Options+Market+MakingChicago,+New+York,+and+London

Deustche Bank)– 1996E2005Managing+Director+– Head+of+NonKFranchise+TradingNew+York+and+London

Peleton Partner)(Global)Macro)Hedge)Fund))– 2005E2008Portfolio+ManagerSanta+Barbara,+California

Grant)Capital)Partners)(Global)Macro)Hedge)Fund))– 2008E2013Founding+PartnerSanta+Barbara,+California

One)River)Asset)Management)(Thematic)Hedge)Fund))– 2014E2017Head+of+Investment+RiskGreenwhich,+Conneticut

ND Investment Club

What$do$Macro$Investors$Trade$– Just$about$anythingFutures:+

Interest+Rate+FuturesCommodity+FuturesEquity+Index+Futures

Foreign+Exchange

Fixed+Income+ProductsGovernment+BondsInterest+Rate+DerivativesCorporate+Credit

EquitiesIndividual+EquitiesSector/Industry+ETF’sCountry+ETF’s

DERIVATIVES:*Macro*investors*often*specialize*in*derivativesExpress*positions*on*all*of*the*above*through*options

ND Investment Club

Where$do$we$Invest$– Truly$Anywhere

What*Countries*Have*I*Traded:*

• United*States• Europe• India• Brazil• Argentina• South*Africa• New*Zealand• Australia• Mexico• United*Kingdom• Thailand• China• South*Korea• Norway• RussiaAnd*Many*More..

ND Investment Club

Todays$Macro$EnvironmentUnemployment$Rate Inflation$(CPI)

10IYear$Yields

4

5

6

7

8

9

10

11

12

12/1/2008 12/1/2010 12/1/2012 12/1/2014 12/1/2016

0

2

4

6

8

10

12

14

16

18

10/14/1977 10/14/1982 10/14/1987 10/14/1992 10/14/1997 10/14/2002 10/14/2007 10/14/2012

I4.00%

I2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

9/1/2008 9/1/2010 9/1/2012 9/1/2014 9/1/2016

ND Investment Club

The$Trade$– Sell$10IYear$Interest$Rate$Futures

StopIloss$and$Profit$Levels

Historic$Futures$Price

60

70

80

90

100

110

120

130

140

10/24/1982 10/24/1987 10/24/1992 10/24/1997 10/24/2002 10/24/2007 10/24/2012 10/24/2017

115

117

119

121

123

125

127

129

131

10/24/2016 12/24/2016 2/24/2017 4/24/2017 6/24/2017 8/24/2017 10/24/2017

StopKLoss+at+$130

Take+Profit+at+$115

ND Investment Club

Portfolio$Risk$Management

Position'One 0.50%Position'Two 0.55%Position'Three 0.60%Position'Four 0.80%Position'Five 0.95%Position'Six 1.00%Position'Seven 1.00%Position'Eight 1.30%Position'Nine 1.50%Position'Ten 1.70%

AUM$Lost$at$all$stops 9.90%Dollars$Risk$of$Ruin 9,900,000$$$$$$$$$$$$$$$$$$$$$$$

%$of$AUM$Lost$at$Stop Risk)Metrics)and)Tools:)• Value+at+Risk+Models• Asset+class+or+country+concentration+risk• i.e.+Brazil+can+not+be+60%+of+risk

• Trade+correlation+analysis

Position)Sizing:)Art)not)a)science• Asymmetric+risk+profiles• Liquidity• Idea+conviction

ND Investment Club

Great$Macro$Trades$in$History$– Stocks$in$1987

170

190

210

230

250

270

290

310

330

1/2/1986 4/2/1986 7/2/1986 10/2/1986 1/2/1987 4/2/1987 7/2/1987 10/2/1987 1/2/1988 4/2/1988 7/2/1988 10/2/1988

ND Investment Club

Great$Macro$Trades$in$History$– GBP/DEM$in$1992

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3

1/1/1991 4/1/1991 7/1/1991 10/1/1991 1/1/1992 4/1/1992 7/1/1992 10/1/1992 1/1/1993 4/1/1993 7/1/1993 10/1/1993

ND Investment Club

Great$Macro$Trades$in$History$– Cotton$in$2010/2011

40

60

80

100

120

140

160

180

200

220

6/2/2009 9/2/2009 12/2/2009 3/2/2010 6/2/2010 9/2/2010 12/2/2010 3/2/2011 6/2/2011 9/2/2011 12/2/2011

Thanks!(Questions?perry.parker23@gmail.com

PORTFOLIO & MARKET UPDATE

1

Portfolio Update

CapIQ not working in BIC so I couldn’t update the portfolio this week…

Market Update▸ Sprint and T-Mobile plan to announce merger▸ Tesla fired about 400 employees▸ IMF has begun preparations for possible rescue of

Venezuela that could require more than $30B ▸ Toys R Us exploring options for potential IPO of

Asian Operations▸ “ I really like her a lot” – Pres. Trump, after

formally interviewing Janet Yellen for Fed chair, will decide on appointment by Nov. 3rd

▸ Bitcoin hits new all-time high… again▸ Bids for Amazon’s second headquarters heating up▸ Senate votes to block regulations allowing US

consumers to sue their banks▸ Apple acquires New Zealand wireless power firm

PowerbyProxi▸ House and Senate leaders have laid out schedule for

drafting and releasing new tax legislation▸ Under Armour considering exit from smaller sports

categories (tennis, outdoor gear, fishing)

PITCH

4

NASDAQ:'PCLNRecommendation:'Buy

William'Schipke10/26/2017

Investment Thesis

The Priceline Group, Inc. offers a growth investment opportunity through:

! Amazing growth story in OTA space is not over by any metric

! Misunderstanding of PCLN’s strategic positioning in Europe and Asia vs. Expedia (EXPE) ≈ More properties and higher take rates

! PCLN’s feedback loop a larger key vs. EXPE than market appreciates over medium/long term.

2

Base Case Price Target: $2,257 Current Share Price: $1928.81Upside: +17.04%

Executive Summary

3

Company Info

Continued Growth Story

• Important Terms• Company Background• Brand Segments• Expedia Comparison

• Past Returns • Global Industry Breakdown to PCLN’s Positioning

• 45% of travel is conducted offline – away from PCLN• Growth industry: 7% CAGR global travel spend; Online travel 12% CAGR

• Forecast TAM and OTA Market Share

Strategic Position vs.

EXPE

Summary• Investment Thesis• Final Recommendation• Appendix (Models)

1

2

Feedback Loop

3

• US Hotel Market vs. Europe & Asia • PCLN vs. EXPE• Moat• China Consideration

• Network Effects• Winner-Take-Most

Important Terms▸ OTA: Online Travel Agent such as Priceline.com and Expedia.com where travelers can book

travel accommodations and services online▸ Gross Bookings: An operating and statistical metric that captures the total dollar value,

inclusive of taxes and fees, of all travel services booked – net of fees and widely used intravel business

▸ Take Rate: The percentage conversion of gross bookings to revenues (i.e. the commission feepaid to OTAs by hotels and non-hotel properties for finding patrons)

▸ Agency Revenues: Revenues from travel-related transactions where OTA doesn’t facilitatepayments for travel services provided (i.e. OTA is a platform that funnels prospectivetravelers to providers and is paid a ‘finders fee’ in the form of a commission)

▸ Merchant Revenues: Revenues from travel-related transactions where OTA does facilitatepayments for services provided (e.g. Priceline’s Name Your Price Tool) where travelers bookand pay PCLN for services and providers charge PCLN instead of travelers

▸ Room Nights: An operating metric that represents the total amount of accommodation nightsbooked through platforms (e.g. If a business traveler books a room for two nights throughPCLN’s brands, two ‘room nights’ are accounted for as being booked through PCLN)

▸ CAGR: “Compound Annual Growth Rate” – A useful growth metric that determines thecompounding growth of a number on an annual basis

4Sources: PCLN 10-Ks & Bloomberg

Company Background

5

" Sixth largest internet company by revenue" Founded in 1997 and publicly-listed in 1999" Company platform allows customers to make travel

reservations with service providers of travel services globally " 225 countries, 239 support offices in 173 cities, &

customer Support in 42 languages" Six brands include Booking.com, Priceline.com,

Kayak.com, Agoda.com, Opentable.com, & Rentalcars.com

Sources: PCLN 10-Ks & Bloomberg

World’s leading brand for booking online accommodation reservation, based on room nights booked. PCLN’s main revenue stream

A leading hotel, rental car, airline ticket and vacation package reservation service in US; North America’s leading discount OTA

A leading travel reservation service catering to consumers in the Asia-Pacific region

A leading worldwide rental car reservation service

A leading provider of restaurant reservation and information services to consumers and management systems to restaurants

A leading meta-search allowing consumers to easily search and compare travel itineraries and prices; recently augmented by purchase of Momondo Group

Traditional Online Travel Agents Metasearch Dining Rental Cars

Main Competitor: Expedia (EXPE)

6

" Started as separate entity after InterActiveCorp (IAC) spin off in 2005

" Company platform allows customers to make travel reservations with service providers of travel services globally

" Spun off TripAdvisor in late 2011" Eight brands include Expedia.com, Hotels.com,

Orbitz Worldwide, Expedia Affiliate Network, Trivago, HomeAway, Egencia, & Travelocity

Sources: EXPE 10-Ks & Bloomberg

a leading full service online travel company with localized sites in 33 countries;

a global lodging expert operating 89 localized websites in 39 languages with its award winning Hotels.com® Rewards loyalty program

U.S. travel websites Orbitz.com and CheapTickets.com& a full service travel brand with websites in seven European countries;

a global online marketplace for the vacation rental industryincluding VRBO, VacationRentals.com and BedandBreakfast.com brands

a leading online hotel metasearch platform with sites in 55 countries worldwide

a leading online travel brand in the U.S. and Canada delivering customer service when and where our customers need it.

Traditional Online Travel Agents Metasearch Non-Hotels

PCLN Gross Bookings Time-Series

7

Being the most direct revenue driver, gross bookings growing at 16.8% CAGR through 2021 is a good sign for revenue generation. PCLN’s platform, along with favorable

demographic and industry trends, will sustain mid-high teen growth in gross bookings.

59%

38%28%

10%23%

19% 16% 18% 17% 16%

0%

10%

20%

30%

40%

50%

60%

70%

$-$20,000 $40,000 $60,000 $80,000

$100,000 $120,000 $140,000 $160,000 $180,000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

YoY

Gro

wth

Mill

ions

Gross Bookings YoY Growth Expon. (Gross Bookings)

Sources: PCLN 10-Ks & Bloomberg

PCLN Revenue Time-Series

8

20.8%

29.1%

24.3%

9.3%

16.5%15.9%

13.7%16.1%

15.2%

14.6%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

$-

$5,000,000

$10,000,000

$15,000,000

$20,000,000

$25,000,000

YoY

Gro

wth

%

$ th

ousa

nds

Revenue YoY Growth Expon. (Revenue)

Forecast 14.9% CAGR revenue base case growth as PCLN’s network expands with very low downside risk and very stable take rates

Sources: PCLN 10-Ks & Bloomberg

Past Returns

9

1

-$10

$0

$10

$20

$30

$40

$50

$60

$70

$80

$0$150$300$450$600$750$900

$1,050$1,200$1,350$1,500$1,650$1,800$1,950$2,100

3/30/1999 3/30/2002 3/30/2005 3/30/2008 3/30/2011 3/30/2014 3/30/2017

PCLN Share Price (Left) PCLN Yearly EPS (Right)

Source: S&P Capital IQ

Many investors may believe they have missed the extraordinary appreciation

Total Addressable Market Analysis

10

The total travel spend on hotels, cars, flights, & other services last year was $1.4 trillion; however, only 45% was conducted online – in the realm of OTAs like PCLN

Sources: PCLN 10-Ks & Bloomberg

1

OTA Travel Penetration

11

Of the $630 Billion online travel spend ($1.4 trillion), OTA's had gross bookings for FY2016 of $150 billion (24%). Non-OTA spend includes direct online booking through

service providers, such as hotel chain websites. Sources: Phocuswright & PCLN

1

OTA Market Share Analysis

12

Of the $150 Billon OTA gross bookings for 2016, the two largest players, EXPE & PCLN had 48% and 46% of the market share, respectively.

Sources: PCLN 10-Ks & EXPE 10-Ks

1

Market Concentration Analysis

13Sources: PCLN 10-Ks & Phocuswright

Of the projected 7.3 billion accommodation room nights in 2016 globally, PCLN had the largest share with ~560 million room nights (8%) which signals a long run forward

1

TAM Forecast

14

Global travel market projected to grow @ 7% CAGR to ~$2 trillion by 2021 (larger pie) plus online devouring friction of offline booking @ 12% CAGR (larger slice of pie

from 45% to 79%) available to PCLN

Total market growing @ 7%

per year

Online 12%

CAGR devouring of Offline

Sources: Phocuswright research

1

OTA Online Penetration Forecast

15

ASSUMING OTA’s do not penetrate the online market further (low-probability), OTA’s 2021 position in market ($376 billion) is more than double than 2016’s $150 billion. If PCLN market share (46%) remains in 2021, PCLN gross bookings would

increase 2.5x from $68 billion to ~$173 billionSources: Phocuswright & PCLN 10-Ks

1

16

BIG PICTURE*How Slides 8-13 Fit Together*

1

17

Taken together, PCLN is facing tailwinds as the global travel

industry is growing faster than GDP and online companies are poised to

take much of the industry from offline providers and grow global

room night share

1

US Hotel Industry vs. Europe2

EuropeUnited States

US hotel market is much more concentrated than Europe or the fast-growing areas such as Asia. PCLN leads in gross bookings ex-USA, so they can negotiate higher take rates

from smaller, less powerful hotel chains

19.7%

13.5%

6.9% 3.8%

56.1%

Marriott International Inc

Hilton Worldwide Holdings

InterContinental Hotels Group

Wyndam Worldwide Corp.

Other

Market Share

Sources: IBISWorld

6.7%

3.9%2.9% 1.7% 1.1%

83.7%

Marriott International Inc

Hilton Worldwide HoldingsInterContinental Hotels GroupAccor SA

Wyndam Worldwide Corp.

Other

" Europe’s hotel industry is extremely fragmented

" Larger players have started to gain share, mainly through franchising

" Franchisees may have less power negotiating take rates

PCLN vs. EXPE2

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

$60,000

$65,000

$70,000

$75,000

2012 2013 2014 2015 2016

$ M

illio

ns

PCLN Gross Bookings EXPE Gross Bookings

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

$9,000,000

$10,000,000

$11,000,000

$12,000,000

2012 2013 2014 2015 2016

Take

Rat

e (R

even

ue/G

ross

Boo

king

s)

$ Th

ousa

nds

PCLN Revenue EXPE RevenuePCLN Take Rate EXPE Take Rate

Even with fewer gross bookings, PCLN’s value proposition, network, and focus on ex-USA areas equate to higher take rates (~4%), larger revenues, and wider margins.

Sources: PCLN 10-Ks & EXPE 10-Ks

Competitive Moat in Room Nights

20

3%

9%11%

-1%-5%

34%37%

18%16%

11%

39%

28%25%

29%

-10%-5%0%5%10%15%20%25%30%35%40%45%

$0

$100

$200

$300

$400

$500

$600

$700

2012 2013 2014 2015 2016

YoY

Gro

wth

$ M

illio

ns G

ross

Boo

king

s

Airline Tickets Rental Car Days Room NightsAirline Ticket Growth YoY Rental Car Days Growth Yoy Room Night Growth YoY

Room accommodations make up the vast majority of PCLN’s gross bookings. Because building the relationships with room providers (hotel & vacation rental) are time-

consuming and costly, new competitors (i.e. Google/Apple) without PCLN’s network effect are barred from quick entry.

2

Sources: PCLN 10-Ks

Chinese Consideration2

173.8

307.8

050

100150200250300350

2009 2015

Ove

rnig

ht A

rriv

als

Overnight Arrivals (mil)

Tourism Expenditures (US$ BN)

135.2

246.9

$0

$50

$100

$150

$200

$250

$300

2009 2015

Expe

nditu

res (

US$

BN

)Tourism Nights (mil)

0

500

1,000

1,500

2,000

2009 2015

Nig

hts S

taye

d

Owning 20% of the leading Chinese OTA, “Ctrip”, PCLN is well positioned to

capitalize on the extraordinary growth of Chinese middle class

Source: Mastercard

Business Feedback Loop

22

Most Frictionless

Online Booking

Larger Supply of

Rooms

Diverse Selection

Customers Attracted

Hotels Meet

Occupancy Hurdle

Other Hotels

Join Platform

Vacation Rental

Owners List

More Customers Book Vacation

Rentals on PCLN

Broader Accommodation

Offerings

Hotels Can’t Meet Occupancy Rates

3

PCLN’s “virtuous

cycle” continues to drive both more room

providers and travelers at a greater pace

than EXPE due to PCLN’s

leading position in

offerings and service to partners

Investment Thesis

The Priceline Group, Inc. offers a growth investment opportunity through:

! Amazing growth story in OTA space is not over by any metric

! Misunderstanding of PCLN’s strategic positioning in Europe and Asia vs. Expedia (EXPE) ≈ More properties and higher take rates

! PCLN’s feedback loop a larger key vs. EXPE than market appreciates over medium/long term.

23

Base Case Price Target: $2,257 Current Share Price: $1928.81Upside: +17.04%

Appendix 1: Revenue Build

24

Appendix 2: Cost Build

25

Appendix 3: NWC & Capex Schedules

26

Appendix 4: Bull DCF

27

Appendix 5: Base DCF

28

Appendix 6: Bear DCF

29

Appendix 7: Relative Valuation

30

Appendix 8: Implied Share Prices

31

Bull Case Base Case Bear Case