Buy Alert: Despegar.com (DESP)

By Jim Pearce • February 26, 2018

TRADE INSTRUCTIONS

Date: February 26, 2018
Name: Despegar.com
Symbol: DESP (NYSE)
Type: Open
Limit: Buy below $30

TRADE TARGETS

Holding Period: 5 months
Target Return: 26.7%
Annualized Return: 64%
Target Price: $38
Support Level: $24

COMPANY DESCRIPTION

Despegar.com, Corp., an online travel company, provides a range of travel and travel-related products through its Website and mobile apps in Latin America. The company offers airline tickets, packages, hotels, and other travel-related products under the Despegar and Decolar brands, which enable consumers to find, compare, plan, and purchase travel products. It provides a technology platform for its travel suppliers to manage and distribute their products. The company was founded in 1999 and is based in Buenos Aires, Argentina. Link to company website.

TRADE RATIONALE       

With the U.S. stock market recently showing signs of cooling off, we are adding an international stock to our portfolio that should benefit from the rapidly improving global economy. Despegar.com is an online travel company dubbed the “Expedia of Latin America.” Expedia, in fact, owns about 14% of the company and could eventually acquire Despegar altogether.

After a few lean years, Latin American economies are rebounding thanks in part to rising commodity prices, and the outlook for travel in the region is bullish. Over the next four years, online travel bookings in Latin America are estimated to grow at 12.5% annually, from $30 billion to $48 billion. Despegar currently enjoys an 11% market share, which it believes it can increase by virtue of its affiliation with Expedia.

Through the end of the third quarter of 2017, the company’s revenue increased by 27% while gross profit improved by 34%. Despegar is scheduled to release its next round of quarterly results on before the market opens on March 8. We’re not expecting fireworks on this call, but we do think the forward guidance could be more optimistic than its recent share price behavior suggests.

NOTE: This stock is not optionable.

Stock Talk

Comments Guidelines
Steve

Steve

DESP filled at $29.50 on TDA

Scott Chan

Scott Chan

A really good end to the week for Despegar. As of about 1 PM (NY time) today (Friday, March 9), the stock is up about 11% from its Wednesday close thanks to a very strong earnings report.

The company easily beat both revenue and EPS expectations ($144 million and $0.167 vs. $136 million and $0.141, respectively).

The underlying metrics indicate strong momentum.

On a year-over-year basis, transaction volume was up 19% for the quarter and 26% for the year. Total revenue increased 30% for the fourth quarter and 27% for the year. You may notice that even though transactions grew at a slower rate for the quarter than for the full year, fourth-quarter revenue actually grew faster.

(To clarify, “transactions” is the number of orders customers book on Despegar’s sites, and revenues is how much money Despegar takes home as the middleman. Remember, the airlines, hotels and other vendors pocket most of the fees customers pay.)

The seeming discrepancy actually shows that Despegar had a more favorable business mix as 2017 progressed. The company has been focusing on growing its Packages, Hotels and Other Travel Products segment, and the numbers show that the effort is working. Even though this segment accounted for just 43% of transactions in the fourth quarter, it contributed 54% of revenue. Average revenue per transaction in this segment also increased from $69.30 to $75.

Despegar’s other segment, Air (airline tickets), is highly competitive. Average revenue per transaction fell by 6% in 2017 to $45.60 as Despegar purposely cut the air fee in the third quarter in certain markets to try to gain market share.

The company is also gaining traction in another important initiative: to increase mobile usage. Mobile transactions rose 45%, and its mobile app has exceeded more than 38 million cumulative downloads by the end of 2017. Compared to a year ago, it’s a 39% jump. 30% of transactions in the 2017 fourth quarter in the were completed on a mobile platform, up from 26% a year ago.

Overall, very good results and the market likes what it saw, as do we. Due to the fact that the stock does not receive a lot of coverage and still has relatively low trading volume, there’s likely going to be some ups and downs in its future, but we fully expect the long-term trend to be up.

Our five-month price target is currently $38.

Rick

Rick

Scott,

Thanks for the breakdown of the earnings report. I notice that you placed the write-up on the Buy Alert that is typical of Jim’s SW service. Many of us bought DESP previously from the Buy Alert in AT and it is in our Pot 3. Since SW and AT are merging as one service, can we assume that for Pot 3 we can expect to hold for 5 months or a price of $38? Or are we decoupling DESP in Pot 3 from this particular alert?
So, I guess I am asking will we have 2 different portfolios in the merged service? The former AT 3 Pot system and Jim’s former SW system?

Scott Chan

Scott Chan

Dear Pat C.,

The stock indeed got off to a rocky start for BRAIN as we wish we did better timing wise. But, ultimately we think Despegar is a quality company and the stock price should eventually head up. We expect the stock action is probably going to continue to have its ups and downs until the stock gains a wider following and wider analyst coverage. Selling some to lock in gains is not a bad idea.

Scott Chan

Scott Chan

Dear Rick,

Good question.

When SW and AT merged, each service had its own stock recommendations. Our plan was to eventually get the holdings to be the same. Hence SW now has PVG and DESP too.

So to answer your question, going forward, we expect to treat PVG and SW as, respectively, one position rather than two separate positions for legacy SW and legacy AT subscribers. So in essence, the first scenario you mentioned.

Pat C.

Pat C.

Thanks Scott. I owned DESP from my rough start with Brain Trust. Added to it with the recommendation here. Sold half today and see if we can keep going from here. Had to sell some up 15% in a little over a week. Great pick and coverage.

Benny K

Benny K

Hi Scott.
As SW subscribers should we assign DESP and PVG to a “pot” or only the Stephen Leeb trades?

Jim Pearce

Jim Pearce

HI Benny. I issue the equity buy alerts for SW and will add a field for which pot each of those trades goes into (per Dr. Leeb) so it is clear. Thank you.

Benny K

Benny K

Hi Jim,thanks for your prompt reply.
Benny

Dramatic License

Dramatic License

Thanks, Jim! That will be very helpful. I’d like to have a bit more clarity on the pot system.

Dan

Dan

I sold out of this position awhile back and I’m wondering if I should be headed back in. Do you think SW is going to extend this position or back out of it? As we get closer to the support level, is it still a good buy?

Jim Pearce

Jim Pearce

Depegar released pretty solid quarterly results last week (https://finance.yahoo.com/news/despegar-com-announces-1q18-over-100000756.html), but this statement from its CEO tempered enthusiasm for the remainder of the year: “As we look to the current year, we will be prioritizing growth and making the necessary investments to continue positioning the Company for long term growth. At the same time, we are cognizant of the need to balance growth investments with profitability; understanding there could be a short-term impact to margins.”
This position does expire until July so it’s too soon to say if it will be extended, but I can tell you that I do not intend to close it prematurely so long as operating results are in line with what we expected.

Pat C.

Pat C.

Any news on DESP? The chart shows continued selling and very little buying. Dropped through our $24 support level and getting a long way from our $38 target.

Jim Pearce

Jim Pearce

There has been no meaningful news out of the company since it released its Q1 results three weeks ago, which were in line with expectations: https://finance.yahoo.com/news/despegar-com-announces-1q18-over-100000756.html. However, this comment in the press release has dampened earnings growth expectations for the remainder of 2018: “As we look to the current year, we will be prioritizing growth and making the necessary investments to continue positioning the Company for long term growth. At the same time, we are cognizant of the need to balance growth investments with profitability; understanding there could be a short-term impact to margins.” With the busy summer travel season coming up, I am going to hang on to it through our target hold period of July 26.

Pat C.

Pat C.

This is one sick trade. Dropped another 17% below original support level of 24 back on June 1. It’s making new lows daily. We now need a 40% gain to get back to even. Too bad how it totally wipes out gains from good trades. This is a problem with not selling losers earlier and waiting for trading instructions from this service. Loss gets so large it is painful to take the loss and afraid to sell because of possible bounce which doesn’t materialize. Shows the fallacy of risk control through small position sizing. You just go broke at small amounts at a time. Very poor trading guidance.

Dan

Dan

Depends on how you are investing. I’m still ahead on this trade as I sold originally at 32. I’ve lost a bit now since I bought back in at 22 but I’m still up overall.
Even if I’d taken the full loss w/o that early sale, I’d still be up a lot of money this year w/ the service. Partial losses don’t wipe out the monster win we got in Jan on that short position. At least they don’t for me.
Also, Jim did provide updates on May 15th and June 1st.

Janis Bell

Janis Bell

While hanging in for the possible summer increase, do you think keeping an open sell order GTC at purchase price is wise in case it gaps up and then drops again before close? I bought at 28.40.

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