Why You Should Hold off on Priceline
Meena is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fresh off its acquisition of Kayak to strengthen its market leadership position in travel reservations, Priceline (NASDAQ: PCLN) has risen above $800 per share and is now up nearly 30% year to date, easily outperforming broader market indices. In the first quarter of 2013, the company’s revenue grew by 26% versus a year earlier with pretax income increasing at roughly the same rate (net margins did increase, but this was due to a lower effective tax rate). Priceline continued to use very little of its cash on capital expenditures, allowing the company to devote a good portion of its cash flow from operations into buybacks with most of the rest fortifying its cash balance.
Markets expect Priceline’s high growth to continue (as well as be supplemented by the addition of Kayak), and the stock trades at 28 times trailing earnings. For such a large company to prove a good growth play at that high a valuation, future growth would have to be quite high indeed. Wall Street analysts expect earnings per share to rise to $38.48 this year, and then above $46 in 2014. Assuming Priceline hits those projections, which imply a forward P/E of 18, then the company would still need to grow further in order to justify the current valuation, but not necessarily at a high rate. It’s been suggested that the Kayak acquisition will help Priceline gain market share in the U.S., where Expedia (NASDAQ: EXPE) is a stiff competitor in terms of bookings.
We track quarterly 13F filings from hundreds of hedge funds and other notable investors, using the included information to help us develop investment strategies; we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about imitating hedge funds' small cap picks). We can also use our database to track interest in individual stocks. Priceline, as it happens, is a favorite of some of legendary investor Julian Robertson’s “Tiger Cubs.” Billionaire Stephen Mandel’s Lone Pine Capital owned 1.8 million shares at the end of March, a position worth over $1 billion at the time (see Mandel's stock picks). Blue Ridge Capital, managed by fellow Tiger Cub John Griffin, reported a position of about 450,000 shares (find Griffin's favorite stocks).
The closest peers for Priceline are Expedia and Orbitz (NYSE: OWW). Expedia’s operating income and earnings declined in the first quarter of 2013 versus a year earlier, even if we add back a couple of special items, though the company’s revenue growth over this period remained strong at 24%. It is valued at a discount to Priceline on a forward earnings basis, at 14 times consensus earnings for 2014, which we believe partially accounts for the possibility that Expedia could lose some of its market share to that competitor. Orbitz has grown its sales at a more modest rate, and profitability has been fairly low on a trailing basis. The stock has more than doubled in the last year, and it is valued at 22 times forward earnings estimates, a substantial premium to both Expedia and Priceline. The most recent data shows that 18% of the float is held short.
We can also compare Priceline to American Express (NYSE: AXP), whose businesses include a travel management unit, and to Chinese travel services company Ctrip.com (NASDAQ: CTRP). American Express has been experiencing only modest growth, going by recent reports, and while its trailing P/E is considerably lower than what we see at Priceline or Orbitz, at 19, that does seem high considering the company’s recent performance. As a result we’d avoid the stock. Ctrip has risen over 90% in the last year, which combined with a decline in the business’s earnings has resulted in quite high P/E multiples. In fact, Ctrip is valued at a premium to all the other stocks we’ve discussed at a forward earnings multiple of 32. The company’s revenue has been up, but we’d still be concerned about that valuation.
With Orbitz not seeming that attractive, and with Expedia’s recent performance being weak, we would say that relatively Priceline does look like the best option in the industry. The question is whether the stock is just too expensive in absolute terms. It seems to us that Priceline’s progress in making inroads into the key U.S. market is the most critical issue here, and so we’d recommend following further developments in that area and potentially doing more research on the company if it appears to be achieving success.
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Meena Krishnamsetty has no position in any stocks mentioned. The Motley Fool recommends American Express, 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!