The $600 billion online travel industry characterizes itself through low costs on capital and very high returns on invested capital. Investment gurus, like Chase Coleman (Trades, Portfolio) and Chris Davis (Trades, Portfolio), know that this market holds promising long term profits, so they recently bought several million company shares of Priceline.com Inc. (PCLN, Financial). This online travel aggregator offers booking services such as hotel rooms, airline tickets, rental cars and cruises. Under the brand names of Priceline.com, Booking.com, Agoda, and rentalcars.com, the company riels in profits through transaction fees for its online bookings. And so far, metrics have been fruitful.
International Expansion to Drive Bookings
Priceline’s business model is built on a cyclical web. The firm appeals to price-sensitive leisure and corporate travelers through its bidding system, which allows brand-name travel suppliers to clear inventory at deep discounts with no damage to the quality of their brand. The company’s recent network expansion, through the acquisition of booking.com in 2004, Agoda in 2007, and an international car rental booking service TravelJigsaw (now rentalcars.com) in 2010, have shown large profit growth. Thus, gross travel bookings have jumped from $3 billion in 2006, to $28 billion in 2012, simultaneously increasing the company’s earnings per share at a 40% rate, compared to the industry average of 8.9%. International bookings have also been the main source of growth, with a 41.8% surge in 2013.
In terms of international expansion, Europe and Latin America’s emerging nations have been the key growth drivers, where the past five years' revenue showed boosts of 43% and 23% respectively, well above rival Expedia Inc. (EXPE, Financial)’s mid-teen growth. The recent shift from traditional travel bookings to the online segment, because of its convenience and better price transparency, has also been beneficial for this company. In Asia and Latin America, for example, online travel spending grows 23% and 29% on an annual basis. This growth trend is expected to continue at larger levels given the regions’ economic growth and higher income levels, fueling travel demands.
Value and Risks
Priceline’s past efforts to expand its customer base have been very successful, given the 33% year-over-year rise in sales, which closed at $2.27 billion in fiscal 2013, and 29.5% revenue growth ($5.3 billion). Company reinvestments are bound to focus on online marketing, in order to strengthen brand appearance in the emerging markets and reel in future profits. The current 34.8% operating margin and 53.2% EBITDA growth should also continue to grow until 2017, as a consequence of the firm’s improving operating leverage in the travel industry.
Nevertheless, some risks remain present, such as competition from non-traditional market players like Google Inc. (GOOG, Financial), or social networking sites looking to breach the travel business segment. Factors like natural disasters, political instability and terrorism threats could also damage travel demand, thus affecting Priceline’s profits. However, I remain bullish about this travel agent’s future, especially regarding its profitability for value investors looking to earn high returns on capital. With this company’s outrageous 2049.80% ROC and very solid 36.40% return on equity, it is an investment that will surely reap profits. The stock is currently trading at 32.8 times its trailing earnings, whereas industry peers’ average is only at 22.4x. Despite its price premium of 46% compared to the industry’s average, I don’t see Priceline as overvalued, due to its outstanding shareholder returns and future profitability.
Disclosure: Victor Selva holds no position in any stocks mentioned.
