That the travel industry can be fiercely competitive, with its highly fragmented market and difficult to retain customer loyalty, is nothing new. However, Priceline Group Inc. (PCLN) seems to be sailing through the recent quarters like a breeze without a doubt and fourth quarter fiscal 2013 was no exception to the rule. In fact, the company’s name change (formerly Priceline.com) is a sign of growth, as the new name comprises all five Priceline brands – Booking.com, priceline.com, agoda.com, KAYAK and rentalcars.com – in the form of a global business, thereby showcasing the firm’s scale. So, despite the company’s high target price of $1217.03, its impeccable balance sheet and outstanding returns on capital make it one of the favorite long-term picks among investment gurus like Chase Coleman (Trades, Portfolio) and John Burbank (Trades, Portfolio). But how will the growth streak continue looking forward?
Outranking the Competition
So far 2014 has already shown some changes regarding management, with Darren Huston replacing Jeffrey Boyd’s as the CEO of Priceline in the beginning of the year. However, the change in CEO positions seems merely a formality, as Boyd will remain as chairman of the board and the company’s main growth strategy, comprised of expanding the brands internationally and garnering the network effect, will not be altered in the medium term. Although Priceline only owns 4% of the global market share in travel bookings (up from 1% in 2009), the company’s growth rate has been top notch over the past years and in the long term is likely to become the world’s largest online travel agent, outranking competitors like Expedia Inc. (EXPE) and Tripadvisor Inc. (TRIP).
With a strong foothold in the fast growing emerging markets, the firm’s Booking.com business (60% of revenue) is expected to generate over 15% revenue growth until 2018, as the company enters its partnership with Ctrip.com International Ltd. (ADR) (CTRP) and revenue growth in Europe accelerates once again. Furthermore, Booking.com’s extensive network of 430,000 properties (200,000 in Europe compared to Expedia’s 75,000) in over 190 countries is an extremely attractive feature for travellers. Thus, the company has amalgamated 30 million monthly website visitors, thereby consistently increasing the travel agent’s market share. In addition to this, the company will benefit from Booking.com’s agency model, which charges hotels a low-to mid-teen booking fee (compared to the 20% fee charged in the merchant model), without generating any associated cost of revenue for the firm. These two factors, in addition to the consistent expansion of international business, will help generate an average EPS growth rate of 20% over the next decade.
A No-Brainer Investment
Despite some analysts’ talk of Google Inc. (GOOG) and Facebook Inc. (FB) possibly entering the online travel business, I believe Priceline’s established online travel network will prevent the firm from losing any market share to the Internet companies. In the long term, investors can be sure that this firm will bring profits, given 2013’s outstanding adjusted return on invested capital of 500% and EPS growth rate of 23.23%. Moreover, the current 28.9% revenue growth will continue to expand in the next decade, with agency revenue increasing at a 16.7% CAGR, 5% merchant growth, and 14.3% growth in advertising revenue, due to the rapidly growing international business.
EBITDA will also continue to grow at a strong pace, expanding from 2013’s 43.3% to 47.0% in the long term, in line with gross margin’s expansion from 84.1% to 93.2%. Although Priceline’s trading price of 33.70x trailing earnings is sporting a premium relative to the industry average of 21.4x, I do not see this stock as overvalued, given the profitable future that lies ahead and sustained returns on investments.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.