More Long-term Growth Is Expected for Priceline.com
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Summer is here, and it’s time to book a trip online for your vacation. For people who have booked a trip or bought tickets online before, then the business model of Priceline.com (NASDAQ: PCLN) can be understood easier. Priceline.com, a leading global online hotel reservation provider, owns and operates several brands, including Booking.com, Priceline.com, Agoda.com, Kayak.com and Rentalcars.com. Booking.com is the no. 1 online hotel reservation website in the world, offering over 295,000 hotels and accommodations.
Continuous strong buyback
Priceline.com is issuing $1 billion of convertible senior notes that are due 2020 with 0.35% interest rate per annum. The conversation price is about $1,315.10, representing around a 63.58% conversion premium based on the closing price of $803.93 on May 31, 2013. Part of the proceeds will be used for share repurchase and the remaining for general corporate purposes. Priceline.com’s Board of Directors had also authorized the repurchase of up to an additional $1 billion in common stocks, representing near 2.5% of current market cap for Priceline.com. The company has been aggressively buying back stocks since 2010, allowing it to maintain its total outstanding shares at around 50 million without much dilution, as seen from the chart below.
Priceline.com has also managed to increase its revenue and profit margin year-over-year since 2009. The company's earnings-per-share increased as well in the same period, as seen from the chart below.
Operating margin compression
Priceline.com continues to invest in its long-term growth. The management expects operating margin compression in the second quarter due to the company's global expansion investment. It continues to build brand name awareness effectively by using a mix of offline and online marketing. Despite lower advertising efficiency, the company continues to invest into the mobile end as well which results in steady growth. Although there may be short-term margin pressure, the company continues to look healthy from the long-term perspective with its continuous growth and increasing brand name awareness. With the successful completion of its acquisition of Kayak Software on May 21, 2013, synergies can be created through Kayak’s international business and the company can also leverage Kayak to expand domestically in the United States.
Through Booking.com, the company continues to shift more of its focus into the domestic market, competing directly with Expedia (NASDAQ: EXPE). Similar to Priceline.com, Expedia also had a solid start for 2013. Expedia is rolling out its Expedia Traveler Preference (ETP) program as expected, with over 25,000 hotels signed up and over half of those live in production. Expedia is taking a smart strategic route to continue its growth. The ETP program will allow Expedia to compete with the agency-model players while maintaining merchant margins. Expedia is pushing aggressively into Europe while Priceline.com is trying to expanding into the U.S. market.
Another competitor, Orbitz Worldwide (NYSE: OWW), is also having a solid start for 2013 with accelerating growth for stayed room nights. The company continues to invest in 3 key areas: mobile, loyalty, and international market. Orbitz rolled out its Orbitz.com Rewards Loyalty program in the first quarter and enhanced its HotelClub initiative with expanded support for more currencies and languages to allow it to expand further into the international market.
With continuous buyback financed with convertible notes, Priceline.com is making a sounding capital allocation decision to leverage its investment-grade credit and to enhance shareholder value. Although there will be short-term operating margin compression due to higher spending to build its brand name and increase customer awareness, the company remains well-positioned globally. By continuing its penetration into the U.S. market, Priceline.com still has more room for upside potential.
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Nick Chiu has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of 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!