Is Priceline Cheap?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I think that investors make a common investing mistake of assuming that a high priced stock is overvalued just because the price is high. However, it's possible for a company with a stock price of $10 to be much more expensive than a company priced at $100. What really matters isn't the price per share, but the earnings and cash flow growth the company exhibits. I think this is a good example of the problem investors ran into with Priceline (NASDAQ: PCLN) recently. With the stock at $750 a share, novice investors might assume it's overvalued. However, even at that price the stock traded at about 25 times forward estimates. By contrast, a company like Amazon.com sells for about $240 a share, and yet trades for a multiple more than ten times higher! As you can see, the price per share doesn't begin to tell the whole story. With Priceline shares down about 20% from their high, let's look at what happened in the earnings report, and see if this high-priced stock might be cheap after all.
Priceline owns multiple online travel destinations including priceline.com, booking.com, and rentalcars.com. These sites compete with Expedia (NASDAQ: EXPE) and individual hotel and airline websites for travel and reservations business. In addition, Priceline is expanding its international presence by striking a recent deal with Ctrip.com International (NASDAQ: CTRP). Ctrip will be given access to the booking.com network of hotels, and in exchange Priceline will receive a cut of the revenue. Even before this deal, Priceline reported significant growth in the current quarter.
The company saw revenues up 20.3%, and non-GAAP net income came in at $7.85 which was significantly higher than estimates of $7.37. What was impressive is, the company produced these results by strong growth in every area of their business. Gross travel bookings were up 26.8%, and would have increased 36% excluding foreign exchange. The hotel business booked 39% more room nights on a year-over-year basis. Priceline's car rental business also grew significantly by booking 29% more rental car days. In addition, the company's international business was very strong with revenues up 40.2% (53% in local currencies), and gross profit up 40.4% (53% in local currencies). It seems like the company did everything right in the quarter, and the company's financials showed equally impressive improvement.
Priceline increased their cash and investments by 48.5% versus last year to a total of $3.95 billion. The company's operating cash flow grew 42.02% if you adjust for a one time pre-paid expense. Also the company showed a significant improvement in their gross margin, which moved up from 67.94% last year to 75.68% this year. Last but not least, the company generated nearly $600 million in free cash flow. If you are like me, you read all of this and wonder, what the heck were investors thinking driving the stock price down 20%?
The short version of why the stock dropped is, investors were disappointed in the company's outlook. With revenue expected to increase between 9% and 15%, and non-GAAP net income expected between $11.10 and $12.10, this was at the lower end of analyst expectations. The average estimate for the third quarter is $11.78. While Priceline isn't saying they are going to miss expectations, the range they gave wasn't above expectations either.
The trouble is I think investors are missing the forest for the trees. Priceline still seems like a much better option than some of their competition. The previously mentioned Ctrip sells for about 16 times forward estimates, and is expected to grow at about 13%. Expedia sells for roughly 17 times estimates and is expected to grow at just 12.14%. Priceline after the recent drop sells for under 20 times earnings, yet is expected to see over 21% growth in earnings. In addition, the company has beaten estimates each of the last four quarters by an average of 7.1%.
Given the choice between two slower growing companies (Expedia and Ctrip) selling for a multiple above their growth rate, or Priceline which is faster growing and selling below its growth rate, the choice is clear. By this measure at least, Priceline could be considered cheap. I would suggest investors take this opportunity to consider whether current prices will allow them to book profits with Priceline.
MHenage has no positions in the stocks mentioned above. The Motley Fool owns shares of Ctrip.com International and Priceline.com. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.