Should You Log on to Priceline.Com for Your Next Investment Trip?

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

So let’s answer the question with details. The shares of the online travel booking service Priceline.com (NASDAQ: PCLN) have plummeted 5% over the past week after the stock rose nearly 20% between October 25 and December 3 because of optimism from bullish analysts. On Monday though, the direction was quickly reversed after Deutsche Bank downgraded the stock from buy to hold, reducing their price target by 11% to $710. The reason cited was a more challenging environment as a result of our ‘Cold War' theses. If you dig deeper you would realize that there is an opportunity to convert these short term ups and downs to long term gains.

More About the Company

Although established as a travel booking service the major chunk of the company’s revenue comes from its hotel booking services and it gets most of its business from Europe. The company generates 82% of its $7.8 billion in gross bookings from international markets, with Europe holding the largest slice. The bleak state of the European economy and the entry of Google in the travel sector have contributed to the downslide. But such downturns do not last forever. The company has established a stand as the leader in the travel industry.

The Travel Industry

The travel industry alone contributes directly or indirectly around 9.1% to the world’s total GDP which amounts to over $6.3 trillion of economic output indicating the huge size of the industry and hence its huge potential. The industry is highly segmented with players like Priceline.com, Expedia (NASDAQ: EXPE), TripAdvisor (NASDAQ: TRIP) and Orbitz Worldwide (NYSE: OWW). The fact is that travel is one of the industries that impact almost everyone in the world economy. It's therefore strange that this is a sector lacking in investment momentum which surprisingly creates a good investment opportunity.

Expedia with a forward price-to-earnings ratio of 16 times has been a torrid stock in the past year. The valuation is still reasonable, but it is clearly regarded as “second in class” to Priceline. The Google Threat (NASDAQ: GOOG), affects it the most as it gets a large amount of queries through Google Search and mobile devices. Moreover the recent spin off with TripAdvisor considered expensive by most analysts means more advertising expenditure for the company.

Its other competitor, Orbitz Worldwide beat earnings expectations in early November, but cut their full year forecast due to slower growth in the European markets. It has the highest earnings per share out of the three but the lowest growth. Priceline’s deal with Kayak means problem for the company as the majority of its search comes from Kayak.

Google Threat

Google recently moved into the travel space with the release of Google Flights and Google Hotel Finder posing a threat to the travel industry. In the case of Priceline, the threat of Google is minimized and overrated. Priceline has a telescoping business abetted by a brilliant international acquisition strategy reflected in Agoda and Kayak. It is undoubtedly the leader in the online travel industry and we expect that its margins will only continue to improve in the near future as they capitalize on the shift towards international and agency revenues and to its hotel business. Like many other companies, Priceline faces a strategic threat from Google, but we believe is it mitigated by their clout in the marketplace and the nature of the online travel business.

Plans for Future

With the recent acquisition of Kayak, Priceline essentially cements itself as the leader in the OTA industry. Priceline has a huge network of hotels, working with more than 240K properties. Bringing Kayak under its wing allows it potentially to gain much wider distribution, while in turn helping Kayak speed up its push into hotels and international markets.

Through its Agoda brands the company has entered into the Asian markets with enough firepower. The result being that growth in earnings from the Asia-Pacific and South American markets outpaces the European and North American markets. This implies that the Asia-Pacific and South American markets may become a more significant percentage of operating income.

Priceline: The Bottom Line

Thus to conclude, the recent decline may scare off a lot of investors, but isn’t it a good time to shop when the goods are on sale. The downside has been because the travel industry is cyclical and is affected by macroeconomics. So, as long as the world economy continues to grow the company will generate outstanding returns. Priceline has been experiencing strong growth internationally, with growth in Asia and the U.S. making up for weakness in Europe.

The stock is cheap. The global outlook is the most feasible explanation for the downside which in no way affects the company’s potential in the long run.

S&P Capital IQ estimates that Priceline will bring in earnings of $37.67 (U.S.) a share in 2013, putting the stock’s price-to-earnings ratio just north of 17 which is very good for a growth stock. Given the fundamentals I recommend a BUY for the stock in long run.

 

 

 

 

 


rounakkhemka has no positions in the stocks mentioned above. The Motley Fool owns shares of Google, Priceline.com, and TripAdvisor. Motley Fool newsletter services recommend Google, 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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