Is This a Company Investors Should Book With?

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a great way to gain a detailed and thorough perspective on a company and its future. As 2012 draws to a close, I would like to focus on a trailblazer in the online travel booking industry: Priceline.com (NASDAQ: PCLN).

Strengths:

  • Accelerated Revenue Growth: In 2006, Priceline reported revenue of $1.12 billion; in 2011, the company announced revenue of $4.36 billion, representing year over year annual growth of 31.24%, and this trend of double digit growth is widely anticipated to continue into the future with projections placing 2016 revenue at $9.10 billion. This growth is primarily due to an increase of Priceline’s market share in its industry: 2008: 0.978%, currently: 3.98%
  • Institutional Vote of Confidence: 98.42% of shares outstanding are held by institutional investors, displaying the confidence of the some of the largest investors in the world have in the company and its future
  • Double Digit Margins: At the moment the company carries a net profit margin of 24.25%, representing a strong and profitable company primed for growth in the future
  • Strong Position in Industry: The company attracts customers through its main selling points, the company offers low prices and discounts through its Name Your Own Price service, there is a wide array of choices for customers with over 201,000 hotel properties across the globe to choose from, a plethora of information on the hotels is located on their website, and  the Priceline website is a one stop shop in terms of transportation and hotels. These business advantages give the company a strong position in its industry
  • Cash & Equivalents: Currently, Priceline holds about $4.7 billion of cash and cash equivalents on their balance sheets, a major upside to the business
  • Increasing Margins: In 2006, Priceline reported a net margin of 6.5%; in 2011, the company announced a net margin of 24.3%; and this trend of increasing margins is only set to continue into the future, with projections placing 2016 net margin at 30.4%. This increase in margins has been a result of revenues outgrowing operating expenses

Weaknesses:

  • Debt: Priceline presently possesses about $1.4 billion of long term debt on their balance sheets, a minor downside to the business
  • Lack of Dividend: In no time in the company’s history has a dividend been paid to shareholders, and no plans have been expressed by the company to implement a dividend program in the near future, a major downside to the business
  • Pricy Valuation: At the moment the company carries a price to earnings ratio of 26.49, a price to book ratio of 12.00, and a price to sales ratio of 7.10, all of which indicate a company trading with a pricy valuation
  • Heavily Declining Revenue Margin on Hotel Bookings: The revenue earned as a percentage of gross hotel bookings by Priceline has been steadily declining over the past years, from 34.9% in 2008 to 22.7% currently, and further declines in this rate are widely expected due to Priceline’s decline in share of the US merchant booking industry due to the Name Your Own Price system. This declining rate is a major weakness for the business

Opportunities:

  • Implementing a Dividend Program: Priceline carries a sizable position of cash on their balance sheets, and implementing a dividend program is a very realistic opportunity which could offer immense returns to long-term investors
  • Growth in Hotel Room Industry: Over the past years the hotel room industry has experienced moderate growth, from 17.5 million in rooms available in 2008 to 21.1 million currently, and further growth in this industry is highly anticipated, and should fuel growth for Priceline if they are able to maintain their current market share
  • Improvement in Rate of Hotel Room Occupancy: Over the past years the worldwide hotel room occupancy rate has fluctuated, from 65.1% in 2008 to 64.6% currently, and any improvement in this rate could spark growth for Priceline
  • Asia-Pacific & Agoda.com: Priceline possesses a very strong presence in the rapidly expanding Asia-Pacific region through Agoda.com, and explosive growth in this market should fuel overall growth for Priceline.com

Threats:

  • Competition: The online hotel booking industry is extremely competitive, with several other major corporations battling with Priceline to offer the best product for the least amount of money, and this competition can lead to margin compression
  • Sluggish Global Economic Landscape: In economic landscapes riddled with uncertainty and stagnation, people are less willing to spend money on traveling, potentially hurting volume growth for Priceline

Competitors:

Major publicly traded competitors of Priceline include Orbitz Worldwide (NYSE: OWW), Tripadvisor (NASDAQ: TRIP), Expedia (NASDAQ: EXPE), and Travelzoo (NASDAQ: TZOO). All of these companies operate in the online travel booking industry and compete directly with Priceline. Orbitz is valued at $285.74 million, does not pay out a dividend, and carries a negative price to earnings ratio. Tripadvisor is valued at $5.97 billion, does not pay out a dividend, and carries a price to earnings ratio of 32.15. Expedia is valued at $8.29 billion, pays out a dividend yielding 0.85%, and carries a price to earnings ratio of 24.13. Travelzoo is valued at $300.06 million, does not pay out a dividend, and carries a price to earnings ratio of 14.56.

The Foolish Bottom Line:

Financially, Priceline is relatively solid. The company possesses accelerated revenue growth, a sizable pile of cash, a small debt load, and business model producing a double digit net profit margin. However, the company possesses no dividend and a very pricey valuation. The company’s future is filled with opportunities that could lead to growth; however, the it’s future is also riddled with fierce competition. All in all, while there is significant potential reward, there is also major risk in Priceline, and the company just faces too much competition and is too highly linked to economic activity for my investment. But over the long term Priceline is capable of providing investors with handsome returns.       


makinmoney2424 has no position in any stocks mentioned. The Motley Fool recommends Priceline.com and TripAdvisor. The Motley Fool owns shares of Priceline.com and TripAdvisor. 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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