Priceline Still Has an Upside Even After Hitting All-Time High

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- By Mark Yu

Almost a month ago, Priceline (PCLN) hit its all-time high of $1,578.13 per share. Priceline is the world's largest online travel agency and is currently valued at $74.26 billion in market capitalization.

According to Fortune, only Priceline and Expedia (EXPE) dominate hotel bookings globally, but are facing competition to startups, such as Airbnb, residential space online marketplace specialist, and also to hotels that offer direct bookings through their website.


Valuations

Priceline had a trailing 12-month PE multiple of 38 times (industry median: 24), PB multiple of 7.5 times (industry median: 1.6) and PS multiple of 7.2 times. Priceline has no trailing dividends.

Market performance

Priceline had a five-year total return of 25.7%, while the Standard & Poor 500 index returned 6.86%. Year-to-date, Priceline delivered 18% versus 10.48%, respectively.

Earnings performance

Priceline delivered its third quarter FY 2016 results. Nine-month FY 2016 performance indicated that Priceline grew its sales by 16.2% to $8.39 billion, while its profits dropped by 28.6% to $1.46 billion.

As observed, Priceline added a $940.7 million goodwill impairment for the period that contributed to the 44% increase in total expenses leading to lower profits. Priceline could have delivered about as much as 17% growth in profits rather than the figure it had delivered otherwise without the impairment expense.


"Globally, our accommodation business booked 150 million room nights in the 3rd quarter, up 29% over the same period last year. The acceleration in room night growth demonstrates the favorable market in which we operate as well as the value of our diverse global platform."

"Looking forward to the 4th quarter, we will continue to invest in smartly marketing our brands and in the tools and technology that benefit both our customers and partners in the online travel marketplace. We also look forward to pushing ahead with OpenTable to build on their strong brand with a strategy that supports both building the core business and international expansion at a more measured pace."

Jeffery H. Boyd, Chairman and Interim CEO of The Priceline Group



Priceline

The $75 billion company was founded 19 years ago. The company provides its consumers, travel service providers and restaurants with leading travel and restaurant reservation and related services. Priceline connects consumers wishing to make travel reservations with providers of travel services around the world.

Priceline independently operates brands such as Booking.com, KAYAK, agoda.com, rentalcars.com and OpenTable.

Priceline claimed that it is the leader in the worldwide online accommodation reservation market based on room nights booked. Its priceline.com website also offers consumers reservations for rental cars, airline tickets, vacation packages and cruises.

Priceline also offers car rental reservations with its rentalcars.com website, airplane ticket price comparison with KAYAK and restaurant reservations with OpenTable.

As of December 2015, Priceline derived 86% of its gross profit and 94% of its operating income from its international business. Nonetheless, Priceline has aggregated its operating segments into one reportable segment. Priceline had a five-year operating margin average of 34.8%.

Overall, Priceline had a five-year sales and profit growth averages of 24.49% and 37%.

Cash, debt and book value

Priceline had $4.4 billion in cash and short-term investments. The company also had $7.35 billion in debt or a debt-equity ratio of 0.75. Priceline also had 22.2% of its $20 billion of its assets in goodwill and intangibles with having a book value of $9.8 billion, compared to $8.8 billion in December 2015.

Cash flow

(Quarterly Filing)

Nine months into FY 2016, Priceline grew its cash flow from operations (CFO) by 26.9% to $2.8 billion. Interestingly, removing the $940.7 positive cash flow in its operations would have rather resulted into a decline of 15% in company's CFO.

In addition, Priceline also recorded about $63.2 million in impairments associated with equity investments in private companies, such as the Hotel Urbano.

Capital expenditures for the period was at $168 million, leaving Priceline with $2.65 billion in free cash flow. Meanwhile, the company also spent $48.5 million in the Netherlands to construct a headquarters office building for one of its websites, Booking.com. As observed, Priceline also allocated much of its cash flow in investment purchases, which was $4.8 billion during the period.

Priceline also took in $995 million in debt, while repurchasing its shares using 28.6% of its free cash flow. On average, Priceline spent 57% of its free cash flow in share repurchases over the past three years.

Conclusion

Besides wanting a better segmented reporting on its income statement, none of the valuations indicated that Priceline is a good purchase at current levels.

Meanwhile, a simple question that could be asked after learning about Priceline's business operations, is could any leading online behemoth, such as Amazon (AMZN) or Alphabet's Google (GOOG), come up with any similar business model and eventually eat through Priceline (or Expedia's) margin?

The answer would be yes, but the expenses associated with starting up this competitive online business would be great and may not be apt for fledgling e-commerce companies. Understandably, Amazon has a lot going into its operations right now, and also seems that it is engaging into the brick and mortar business, the Amazon Go. Google, meanwhile, had a humongous $83 billion in cash and marketable securities as of September.

Nonetheless, Stifel still sees Priceline shares as a buy and indicated a price target of $1,900 a share after the company already hit its all-time high. Susquehanna, back in October, also had a positive rating on Priceline and had a $1,700 target.

(Google Finance)

Five-year historical profit growth and earnings multiple average, including a 20% margin, provided a value of $1,700. Indeed, even this quite conservative valuation resulted into an indication that Priceline is still undervalued at the current price.

In summary, Priceline is a speculative buy with a target price of $1,600.

Disclosure: I do not have shares in any of the companies mentioned.

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