Four Reasons to Buy priceline.com

Anindya is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

priceline.com (NASDAQ: PCLN) was recently upgraded by Lazard Capital Markets from “neutral” to “buy” in a note issued to investors last week. Priceline last announced its earnings results on Feb. 26. The company reported $6.77 EPS for the quarter, beating the consensus estimate of $6.50.

The company posted revenue of $1.19 billion in the quarter, in line with the consensus estimate of $1.19 billion. During the same quarter in the previous year, the company posted EPS of $5.37. The company’s revenue for the quarter was up 20.2% year-over-year.

Priceline has set its Q1 EPS guidance at $4.90 - $5.30. Analysts expect that priceline will post $37.87 in EPS for the current fiscal year. In this article, I’ll make a bullish case for Priceline, while highlighting some long-term concerns for the company.

Investors should buy Priceline: Four reasons

Priceline is an online travel company. It operates a bunch of travel sites including Priceline.com, booking.com, agoda.com, and rentalcars.com. I feel investors should consider buying Priceline’s stock for the following four reasons:

1. Priceline’s International Expansion: Priceline, the leader in the U.S. for online travel in terms of gross bookings, is now focusing on expanding its leadership position in international markets as well. The opportunity in the Asia-Pacific region, Europe, and South America is significant, and is likely to remain one of the strongest drivers of the company’s business over the next few quarters. This is because online penetration in many Asia-Pacific and South American markets remains relatively low, and in Europe the worst seems over in terms of economic recession.

Priceline’s gross bookings from international markets, as a percentage of total bookings, have gone up from 55% in 2007 to 82% in 2012. Asia-Pacific and South America contributed highly towards acceleration in gross bookings that Priceline reported in Q4 2012. Key European markets represented approximately 60% of Priceline’s total booked room nights in Q4 2012.

2. Stronger Hotel Inventory: Hotel booking is the company’s stronghold with a contribution of over 86% to Priceline’s revenue. Hotel booking is estimated be the most important division in Priceline’s portfolio. With over 20% revenue margin, hotel booking is also the most profitable division compared to airlines (3%), and car rentals & cruises (9%).

Priceline’s growth in hotel room night bookings accelerated to 38% in Q4 2012, compared to 36% in Q3 2012. The company continues to build on its worldwide hotel supply platform, and currently has over 275,000 hotels and other accommodations in 180 countries and territories, up 41% annually.

3. Priceline Owns Profitable Web Properties: Priceline owns a bunch of travel sites including booking.com, agoda.com, and rentalcars.com. Headquartered in Europe, booking.com has been its key to growth over the last several years. Booking.com is the largest hotel booking site in the world.

In November 2012, Priceline announced it was acquiring airline fare site Kayak for $1.8 billion. The deal is expected to close in the current quarter. Priceline had won anti-trust approval to buy Kayak Software Corp. as said by Federal Trade Commission on January 8, 2013. Kayak Software offers a website and mobile applications to help consumers compare prices for airline, hotels and rental cars. Kayak's search data is valuable for Priceline, while Kayak's mobile applications should help Priceline compete on the mobile end.

4. Growing Mobile Bookings Business: Priceline witnessed significant adoption in most of the major mobile platforms, including iOS and Android. Apps for iOS and Android delivered substantial business on mobile website brands around the world in Q4 2012, the management said.

Mobile phones are particularly used for last-minute bookings, and Priceline has successfully managed to grab a significant chunk of the growing last-minute mobile bookings business. 

Priceline’s longer term worries

Competition Growing in Hotel Booking Business: The hotel booking business faces stiff competition from peers like Expedia (NASDAQ: EXPE) and Travelzoo (NASDAQ: TZOO). Expedia is increasing its hotel inventory and entering into strategic relationships. Hotel booking is Expedia’s main focus, with a contribution of around 25% in revenue. The company has entered in successful joint ventures with Air Asia, Fotopedia in France and Japan, and eLong in China.

Travelzoo has also witnessed robust growth in its hotel business, primarily driven by Getaways hotel offering. Getaways, which was launched in 2011, is a voucher model which is gaining popularity among medium and small size hotels, as it provides them with an opportunity to stimulate incremental sales.

Currently, Travelzoo does not offer direct online bookings for a specific date. However, it is in the process of opening up a hotel booking platform, and is working towards providing its users the ability to book hotels directly via its website through mobile devices. Additionally, the company intends to ramp up its hotel sales force to capture the growing demand for Getaways.

Mobile Business Vulnerable to Competition: Priceline’s last-minute mobile bookings business is expected to be negatively impacted by services offered by rival firms. With social media integration, Travelzoo saw a robust increase in its mobile traffic. Expedia recently launched an updated mobile app that’s available in the United States on iPhone and Android platforms. The app, which previously featured only hotels, is now packed with information about flight and hotel availability, as well as cancellation messaging that users expect to see while booking on Expedia’s desktop site.

Relative valuation

Despite the concerns stated above, Priceline is an aggressive growth story with an expected 2013 earnings growth of 21%, according to Zacks. It trades with a forward P/E of 19.3, compared to Expedia’s 20 times forward estimates and Travelzoo’s forward P/E of 17.2. Travelzoo’s earnings growth is expected to be negative, which is (7.5)% for 2013, while Expedia’s expected 2013 earnings growth is 16.4%.

Conclusion

With an expected earnings growth that’s highest among peers, Priceline certainly deservers a “buy” rating on its shares. Analysts at Raymond James, Macquarie, and Nomura raised their price target on the shares of Priceline in the range of $820 to $850.


Anindya7 has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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