The Should you Follow the Negotiator's Lead?

By Ryan Guenette - July 16, 2012 | Tickers: EXPE, OWW, PCLN, TZOO, TRIP | 0 Comments

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In William Shatner’s final advertisement for Priceline.com Inc. (NASDAQ: PCLN), as the Priceline Negotiator, he saves a bus full of paranoid people from dropping of a cliff, and introduces them, and the audience, to the new fixed low price system that will overtake the auction style system Priceline had in effect, before plunging to his dramatic death in the ravine below. The Priceline Negotiator has bought his last share of Priceline.com, should you follow his lead?

Priceline has been on a rampage ever since the beginning of 2005, rising from a meager $25 per share to the current level of around $650, handing investors in the company in 2005 26 times their initial investment. In so doing it outperformed each and every one of its competitors, Orbitz Worldwide Inc. (NYSE: OWW), Tripadvisor Inc. (NASDAQ: TRIP), Expedia Inc. (NASDAQ: EXPE), and Travelzoo Inc. (NASDAQ: TZOO), by a marginable rate. So are there any reasons to jump into Priceline at these historically high prices, which have not been seen since the Initial Public Offering in 1999?

Growth That Outpaces Competitors

Priceline is a high growth company, and has outpaced its competitors because of its sustainable and explosive growth. For the current year Priceline.com has the second highest growth rate in the sector for this year, but for the forthcoming next 5 years Priceline is king. The chart below presents the growth rates.        

Priceline is the best long term investment in the sector judging by the growth rates. This top position in the sector is held because of Priceline’s unique strategy for growth. Not only does Priceline expect to expand in its hotel booking business, but Priceline also plans to take a sizable position in the car rental business. Now Priceline will not only control the hotel side of the vacation or trip, but will also control the transportation side of the business. Additionally, Priceline will look to its Agoda.com and Booking.com to supply growth from the emerging markets in Asia-Pacific and South America. Just take a look at Priceline’s expected sales (black bar), operating profit (yellow bar), net income (green bar), net margin (green line), and operating margin (yellow line) over the coming years.

Not Cheap, But Not Expensive

Priceline has a price to earnings ratio of 29.20, which is well above the average for the S&P 500 (around 15), but to truly justify the price to earnings ratio, the price to earnings to growth ratio must be taken into account. The price to earnings to growth ratio is fairly valued when it is sitting at the 1x level. Priceline's shares are underpriced when growth is taken into account. When you look at the industry average price to earnings ratio of 123.02, Priceline’s 29.20 price to earnings ratio looks like a little puppy compared to a Rottweiler. The bottom line is Priceline is not expensive, but it not exactly in the discount department store.

Priceline is the King, and No One Can Touch the King

Priceline is by far the biggest company in the space and has the largest percentage of the market. Priceline.com has a market capitalization of 31.71 billion. The closest company in the sector is Tripadvisor Inc. (NASDAQ: TRIP) at 5.90 billion. When a company becomes the leader in a specific sector, such as Apple has become in the market of tablets and smartphones, it is much harder to dethrone them, because their resources vastly outnumber the smaller competitors, and anything a smaller competitor does can be done better and on a grander scale by Priceline. Because of Priceline's incredible growth rate and leadership in the sector, it should continue to outperform the market.

The Foolish Bottom Line

Priceline may face some gigantic problems in the coming years, as the global slowdown will severely affect Priceline as the majority of their revenue is obtained internationally. This may lead to slowing growth in the earnings which in turn will lead to a lower multiple for the stock, which will lead to lower prices. Despite these fears, Priceline still possesses incredible growth fueled by emerging market economies, and is the clear cut leader in its respective market. Priceline will not hand investors 7 years from now 26 times their initial investment, like it has done the past 7 years, but will offer solid and reliable returns, making it the perfect long-term investment.      

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