Acquisitions Are Driving This Stock’s Rally

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You will have to go back 14 years to find a point when Priceline.com (NASDAQ: PCLN) traded above $900. The company experimented on selling gasoline and groceries under the "name your own price" model in the year 2000, at the height of the dot-com bubble. Priceline.com stock plummeted to an all time low, to trade below $10 per share, and struggled to recover up until 2006. In 2003, Priceline was making a mere $10 million in profits. However, the company reported profits in excess of $1.1 billion last year.

Expanding beyond barriers through acquisitions

Priceline has made several moves since the beginning of its recovery, acquiring startups to boost online bookings business.

The company acquired Booking.com for $133 million in 2005, which seems to have triggered the rally beginning 2006. In 2007, Priceline added Agoda.com to its portfolio, a Singapore-based online booking company specializing in the Asia Pacific region. In November last year, the company also announced the acquisition of Kayak for $1.8 billion.

Among all these acquisitions, one stands out, the acquisition of Booking.com, which specialized in hotel bookings in Europe. This unit was key to the company’s most recent quarter results, which boosted the stock by nearly 4% after the announcement. Since then, the stock has soldiered on and looks set to set a new 14-year high, at least according to Morgan Stanley analysts. The analysts placed a price target of $1,010 citing progressive growth in bookings in Europe.

Additionally, Booking.com has been aggressively advertising in the U.S, meaning that an impending move is on the offing. Following its success in Europe, this could only mean more revenue potential, especially given the fact that the U.S economy is on the recovery lane. If Booking.com can replicate its European success in the U.S, then this acquisition could become one of the best ever made by a company.

Overall, acquisitions, which make a majority of the company’s international business account for 85% of its revenues. The company’s Booking.com accounts for about 47% bookings in Europe compared to rival Expedia’s (NASDAQ: EXPE) 21%. Priceline’s international bookings increased 43% year-over-year from the most recent quarter, compared to a guidance of 35%-42%. The satisfaction rate according to client feedback stands at a massive 60%, which supports a brighter outlook.

Competition

Just like Priceline, Expedia has made key acquisitions over the recent past. The company’s acquisitions of Hotels.com and Hotwire.com have been pivotal to its revenue growth. Expedia also spun-off Trip Advisor, which now traded separately on the NASDAQ under the symbol TRIP.

Another major rival to Priceline is Orbitz Worldwide (NYSE: OWW), a Chicago, IL-based general entertainment company. It helps leisure and business travellers to research, plan, and book a range of travel products and services globally.

Last week Orbitz announced the launch of online video service, “Orbitz Originals: The Great Qatar Airways Adventure,” in conjunction with Qatar Airways. The video service will help travellers in understand more about Qatar and experiences in the country's leisure resorts. Just like its main rivals, Priceline and Expedia, Orbitz operates under different brands targeting various regions across the globe. They include cheapsticks.com, ebookers.com and hotelclub.com, among others.

Nonetheless, even with these brands, Orbitz is still the smallest amongst its competitors, with a market cap of just over $1 billion. Priceline is the giant, with a market value of more than $46 billion, while Expedia’s market cap stands at $8.61 billion. The same trend is replicated in revenues and profitability.

Driven by massive growth in bookings in Europe via its Booking.com division, Priceline’s revenues have been growing by about 20% over the last four quarters. The company’s earnings have averaged a growth rate of 30% over the same period. In the most recent quarter, Priceline’s revenue grew by 25.52%, while earnings were up 34.48% year-over-year. On the other hand, Expedia’s revenue grew by 24%, while Orbitz revenue was up 7%.

In terms of operating margins, Priceline proves why investors are placing too much premium on its price. The company’s operating margin stands at a massive 35% compared to Expedia’s 12% and Orbitz’s 7%.

The bottom line

If not for the acquisition of Booking.com and Kayak, Priceline could probably be struggling to report profits upward of $100 million. However, these acquisitions have boosted the company’s profit potential, and according to recent results, the international business is driving growth for the Norwalk, CT-based online travel and hotel booking company.

The company’s stock price has more than quadrupled since end of 2009, adding on the rally that began shortly after the acquisition of Booking.com. Last year’s $1.8 billion acquisition of Kayak is also beginning to pay-off, as the company seeks to cement its position as the leader in online bookings.


Nicholas Kitonyi 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!

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