Flying a Bit Too High

08/25/2010 5:10 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It’s tempting to say that the 6% drop in Ctrip.com International’s (Nasdaq: CTRP) shares on August 10 after the company’s August 9 earnings report was just the usual selling on the news by momentum investors who are unhappy that the company beat Wall Street estimates by only two cents a share and didn’t raise guidance for its third quarter.

But when you’re looking at a stock that’s trading at 43.5x projected 2010 earnings per share, I’m not sure there’s any “just” about an earnings report that didn’t shoot out the lights.

There’s just enough in the numbers to concern any investor counting on the company to keep growing earnings by 30%—at a minimum.

Here’s what the company reported.

For the second quarter, Ctrip.com, a strong number one in China’s online travel industry, reported earnings of 23 cents a share. That was two cents a share above Wall Street projections and represents year-to-year earnings per share growth of 35%. Revenue climbed by 46% from the second quarter of 2009 to $103 million. That was above the Wall Street consensus for revenues of $98.9 million.

From there, the numbers get a little disconcerting for an expensive growth stock. The company’s guidance for the third quarter was, at 35% to 40% revenue growth, only in line with Wall Street projections of $112 million in revenues.

And management raised doubts, in my mind at least, about the company’s ability to meet those goals. Growth in air ticket sales in the second quarter trailed management’s previous guidance. And the company faces significant headwinds in that part of its business starting in the third quarter.

Following the lead of Air France-KLM, international and domestic airlines have cut commission rates in China.  Few airlines have been as aggressive as Air France, which cut rates to near zero, but many airlines, including China’s three major airlines, have cut commissions. In August, Lufthansa and Air Canada joined in by cutting commissions to 1% from 3% and from 3% from 5%, respectively.

That means Ctrip.com, which generates about 40% of its revenue from air tickets, will have to make up for falling commission rates from increasing ticket volume. That’s not impossible, but it is hard. Ticket volume grew by 18% in China in the first six months of 2010.

I’d still like to own shares of Ctrip.com, but 43.5x projected 2010 earnings per share seemed very rich given the uncertainties in the stock. Since then, the stock has dropped to $39 as of August 25  (42x projected 2010 earnings).

That’s lower but still pricy considering the risk in the second-quarter numbers. For now I’ll watch. Ctrip.com is a member of my Jubak Picks 50 portfolio.

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