This High Flyer Just Crashed: Buying Opportunity?
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shares of Priceline (NASDAQ: PCLN) came down by an eye-popping 17% after the company´s results disappointed investors last Wednesday. But growth perspectives look good in the middle term, and Priceline is a leading company in a very attractive industry. Priceline is a high risk bet, but it also offers the potential for extraordinary returns in the middle and long term.
Priceline was trading in the area of $50 per share in the third quarter of 2008 and, even after the recent fall, they are still above $550 nowadays. Priceline has lost near 30% from its record price of $770 in May of this year, but the company has done extremely well for investors in the long run. When a strong performer like this one takes a big price drop, the opportunity is worth considering.
Priceline is an online travel aggregator that offers booking services, airline tickets, rental cars, cruises, and other vacation packages. The company operates under the Priceline.com name in the US, Booking.com in Europe and Agoda in Asia.
Priceline has achieved higher growth rates than its competitors over the last years, and that has produced economies of scale in a business with considerable operating leverage. While sales grew at more than 30% annually over the last five years, earnings per share increased at a much faster 65% per year during the same period.
Looking at the recent quarter, it doesn´t look so terrible after all: revenue in the three months ended in June rose 20%, year over year, to $1.3 billion, yielding EPS of $7.85. There is a clear deceleration in many growth metrics, but Priceline is still doing fine.
The hotel business is performing quite well, while airline tickets are more worrisome. Hotel room nights units sold rose by 39% in the quarter, down from the 47% rate in the prior quarter and the 56% rate in the year-earlier period. Airline ticket sales in units terms fell 1.8%, year over year, reversing 4.9% growth in the prior quarter and 7.3% growth a year earlier.
It looks like growth is slowing down recently, but the economic context is probably responsible for a good part of that slowdown. Travel is a cyclical industry, and Priceline generates nearly 60% of bookings from Europe, which took a double hit in the quarter due to both a soft demand and a weaker currency in the Eurozone.
But Priceline is starting to look much better in terms of valuation. This high flying stock which used to trade at lofty valuation levels is now carrying a reasonable P/E ratio in the area of 25. In fact, the company looks attractive in comparison to its competitors from a fundamental and valuation point of view.
The table compares financial metrics for Priceline versus other companies in the sector like Expedia (NASDAQ: EXPE), Travelzoo (NASDAQ: TZOO), Orbitz (NYSE: OWW) and Ctrip (NASDAQ: CTRP). Its global competitors are well behind Priceline in terms of financial performance, with the possible exception of Ctrip, which is doing quite well due to its strong presence in Asia, but still below Priceline.
Priceline has delivered higher growth in sales and earnings per share than any other company in the group; it also has the highest profitability in terms of operating margins and Return on Equity (ROE). However, the valuations are quite similar; Priceline is trading at a forward P/E of 14.4 which is much in line with the ratios levels observed in other companies.
Priceline has the strongest fundamentals among the group in terms of growth and profitability, but it’s trading at no premium at all to its competitors, this signals the possibility of a buying opportunity from a mathematical point of view.
Those who believe the current weakness is temporary, and Priceline will keep growing nicely in the future, may want to consider the recent slump as chance to buy shares of this high performer at discounted prices. If history is any guide, buying the dips in Priceline tends to be a profitable strategy in the long term.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Ctrip.com International and Priceline.com. Motley Fool newsletter services recommend Ctrip.com International, Priceline.com, and Travelzoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.