Is Priceline Worth the Price?

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

With consumer spending on the rise, some of the natural beneficiaries are travel companies, as traveling is something people love to do when they have money. Several firms in the industry have seen strong rallies this year, on the back of better-than-expected results. Priceline.com (NASDAQ: PCLN), one of the largest travel websites, recently came out with a solid earnings beat, and has over the last few years been growing earnings impressively. Additionally, the stock isn’t too expensive at the moment.

Company Overview

Priceline.com is an online travel company, known among other things for its Name Your Own Price system. It provides hotel reservations, as well as airline tickets and car rentals. With a market cap of $46.74 billion, it is one of the largest companies in the industry, and its stock has rallied over 66% in the last twelve months. Not too volatile, the stock has a beta of 1.16.

Impressive Growth

Despite the economic downturn that has affected many consumer-oriented industries throughout the crisis, Priceline has been doing a fantastic job growing earnings over the last six years or so. Annual EPS has grown from $4.04 in 2007 to $31.28 in 2012, EPS increasing as well as beating estimates every single year. Going forward, analysts expect a 3-5 year growth rate of around 52%.

The company’s latest report, for Q2 2013, showed yet another quarter of strong growth. Excluding items, EPS came in at $9.70, easily beating the $9.37 consensus. This figure was up some 24% from the same period a year ago. Consolidated gross bookings of $10.1 billion increased by 38% year-over-year, and revenue of $1.68 billion also comfortably beat the $1.65 billion consensus estimate.

The company saw especially strong growth in the car rental segment, with rental car days booked up 46%. Hotels also did well, with hotel room nights booked up 38% for the quarter. During this period, Priceline completed the acquisition of Kayak, which contributed about 3% of inorganic growth. Looking ahead to Q3, the company expects an increase in total gross bookings of between 27% and 34%, with revenue growth between 23% and 30%.

Online Travel Competitors

Expedia (NASDAQ: EXPE) is one of Priceline’s major US competitors. This company has also been growing annual EPS over the last few years, but compared to Priceline, this growth appears almost stagnant. Between 2007 and 2012, annual EPS grew by only 27%. Additionally, annual EPS missed analyst estimates every year except 2009 and 2011. With an expected 3-5 year growth rate of -0.2%, things aren’t expected to get much better either. Additionally, the stock is more expensive than Priceline’s.

Chinese competitor Ctrip.com (NASDAQ: CTRP), which offers travel services mainly in China, has also been having a hard time growing earnings in recent times. Annual EPS dipped to $0.80 in 2012 after peaking at $1.12 in 2011. Nevertheless, the stock is up an astounding 221% over the last year, on the back of some very sizable EPS beats in 2012 and 2013. This has left the stock trading at a steep premium however, and it remains to be seen how long it will be able to keep up this performance.

Valuations and Metrics

Priceline is the cheapest of the stocks mentioned here looking at price-to-earnings ratio, with a P/E of 32.33 times trailing earnings versus Expedia’s 48.75 and Ctrip’s 52.43. Moreover, the forward P/E is quite reasonable at 19.73. On the other hand, the price-to-book of 11.62 is very high. The stock’s return on equity of 42.74 is way ahead of the industry average, as is the operating margin of 34.8%. Finally, the firm has a fairly strong balance sheet, with $1.46 billion in debt and $5.18 billion in cash.

The Bottom Line

Priceline.com appears to be one of the fastest growing travel companies at the moment, and has shown its ability to steadily grow earnings and revenue each year. With another big beat, and encouraging guidance, this performance should continue for the foreseeable future. Additionally, the company is cheaper than its main rivals, all of which makes the stock a solid bet for investors looking to profit from the growing online travel industry.

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Daniel James has no position in any stocks mentioned. The Motley Fool recommends Ctrip.com International and Priceline.com. The Motley Fool owns shares of Ctrip.com International and 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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