Priceline: Buy on Weakness
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Priceline (NASDAQ: PCLN) took a beating after announcing its Q2 earnings, as the stock crashed ~ 15% after the earnings call. We believe that the drop is largely overdone given that the top line miss was caused due to on-going macro weakness in Europe rather than company specific execution issues. We expect an upside to Priceline’s stock prices as the macro conditions improve. As we look at the long term growth prospects for Priceline and its utter dominance in the international markets, we believe that this fall provides a window of opportunity for long term investors and rate Priceline as a buy.
Why the greater than $100 price drop?
- Top line miss:
Gross Bookings of $7.33 billion & revenues of $1.33 billion were slightly below Street estimates at $7.52 billion and $1.35 billion respectively.
- Recession-esque guidance:
Q3 guidance implies a “recession-esque” International Bookings trend (-3% QoQ decline in Bookings at the Midpoint). Management seemed very cautious on Europe (~60% of its business) due to the soft demand environment (based on July and a week of August bookings data).
- Expedia beat Priceline in the domestic market for the second consecutive quarter:
Priceline’s Domestic Bookings growth at 5% was below that of Expedia (NASDAQ: EXPE) at 13% in Q2. However, we believe that this difference might appear less noticeable if we adjust for the reporting variations between both companies. For example, while Priceline doesn’t include domestic bookings done through Booking.com, Expedia does include international bookings done through Hotels.com.
The underappreciated positives in Q2
- Bottom line performance:
Both EBITDA & Non-GAAP EPS at $495 million and $7.85 were ahead of Street estimates at $469 million and $7.37 respectively.
- Priceline continues to gain market share in International Bookings:
Priceline continues to outpace its peers in terms of International Bookings growth. In Q2, Priceline's International Bookings grew 33% YoY vs. Expedia at 12% and Orbitz (NYSE: OWW) at 3%. As Priceline already enjoys a leadership position in the international markets, this growth will further increase the gap between Priceline and its competitors. Furthermore, with its growing presence in Latin American countries, we believe Priceline is destined to increase its standing in the international markets in the near future.
- Priceline’s Hotel network continues to grow at rapid rates:
Priceline’s Q2 Hotel Room Nights at 50 million were up 39% YoY vs. 47% in Q1. Rental Car Days continued robust growth with 30% YoY growth in Q2, mainly driven by the TravelJigsaw acquisition in 2010. We believe that the TravelJigsaw acquisition was a strategic win for Priceline and will help Priceline grow in the car rental sector in the long term. The number of hotels also showed robust growth as they rose 52% YoY to 235,000.
- Strong Balance Sheet & Share Repurchases
At the end of Q2, Priceline had around $3.9 billion in cash and equivalents. Although there was no announcement for share buyback in the earnings call, Priceline’s CFO Daniel Finnegan indicated that the $3.9 billion will be available for general corporate purposes “including share repurchases, acquisitions and debt repayment.” As the stock took a beating recently, we believe that there could be an announcement of share repurchases soon enough.
The buy on weakness opportunity:
We see solid valuation support as the stock is currently trading at a low forward PE of 15.6. We believe that the drop in share prices was vastly overdone following the weakness in Europe and remain positive about the long term growth prospects for Priceline. Additionally, Priceline also announced its agreement with Ctrip (NASDAQ: CTRP), following which Ctrip will be adding Booking.com's global Hotels portfolio to its hotel reservation service. While this agreement might not result in considerable revenues anytime soon, we believe that this will increase Booking.com’s visibility among travelers from the Asia-Pacific region. As we remain positive considering Priceline’s Asia & Latin America expansion, rental cars rollout growth and hotel growth in Europe, we rate Priceline as a buy.
Note: The article was originally published on TheAnalystHub.com. For more in-depth research articles please visit our site today.
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