Priceline (PCLN, Financial) is the world’s largest online travel and services company, but it is by no means looking to stop there. The company recently acquired 10% ownership in China’s leading online travel booking site CTrip.com as it seeks to capitalize on the growing middle class in the country.
Priceline will report its fourth quarter 2015 results on Wednesday before the bell, and as always, the company is widely expected to wipe out analyst estimates for revenue and earnings. Investors may be more interested, however, in the type of guidance the management will give for 2016.
Priceline beat analyst estimates on earnings and revenue for the third quarter of 2015 but issued a weak guidance, which led to the decline in the stock price. However, it would be naïve to assume that the plunge witnessed between November 2015 and February this year was primarily due to the weak guidance.
In general, stocks have fallen globally since the start of this year. In relation to this, Priceline stock price fell from $1,274.95 to $974 per share between Dec. 31, 2015 and Feb. 8. That change represents more than 23% drop in market value during a time when even the strongest of companies saw massive declines.
Nonetheless, shares of Priceline have responded in recent trading sessions in anticipation of positive results and are now up nearly 13% since Feb. 8. Even after this recent rally, the company’s stock is still down nearly 14% year-to-date and 34% from its all-time high of $1,476 witnessed in early November last year.
Despite plunging by nearly 35% over the last three months, Priceline is still one of the highly priced stocks in the industry. The company’s shares currently trade at a P/E ratio of about 22.92x compared to the industry average of about 17.43x, while close peers Expedia (EXPE, Financial) and Sabre Corp. (SABR, Financial) currently trade at P/E ratios of 17.85x and 13.31x.
The company’s P/S ratio of 5.81x compared to Expedia’s 2.31x and Sabre’s 2.41x also compares negatively and is way above the industry average of 2.14x. As such, one would wonder why investors are still willing to invest in the stock, especially given the recent resurgence in the price per share.
The simple answer to that question would be that Priceline boasts stability and has demonstrated this over the last few years in the form of revenue growth. The company’s revenues have increased by CAGR of 25.6% over the last five years and 21.4% in the last three years.
The company’s earnings have also maintaind an upward trending trajectory since 2010 and are expected to continue in the same format in 2016, and the foreseeable future as demonstrated in the chart below.
Priceline also enjoys impressive margins when compared to rivals and these guarantee stability even when the top line appears to be tightening.
The company has an average operating margin of 48% for the last three years. The current levels stand at 35% for the operating profit margin and 27% for the net profit margin. In comparison, the average operating profit margin for the industry stands at 6%, while Expedia and Sabre have operating margins of 7% and 17%.
Priceline also trumps its peers with a gross margin of 92% for the trailing 12-month period as compared to Expedia’s 80%, Sabre’s 34%, and the industry average of 38%. As such, it is quite clear that investors are analyzing the company with a keen focus on its fundamentals and financial stability rather than valuation multiples.
Analysts expect Priceline to report EPS of about $11.83, which is above the management guidance of $11.50. If the company can repeat the heroics of third quarter results and beat analyst estimates, then there is no doubt that the stock price would respond accordingly.
Conclusion
The bottom line is that Priceline is better valued by comparing its current valuation multiples with its historical averages. For instance, shares of the company have traded at an average P/E ratio of about 30x for the last three years, while the industry average has mostly been below 20x as is the current case.
Therefore, Priceline’s current P/E ratio of about 23x leaves a lot of room for the company’s stock price to run in order to catch up with its usual valuation levels. This means that shares of Priceline could easily rally to within $1,500 a share in the near future.
Disclosure: I have no position in any stock mentioned.
