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Priceline Is Positioned for Growth

May 17, 2014 | About:

Priceline Group Inc. (NASDAQ:PCLN) is an online travel company that offers its customers hotel room reservations at over 295,000 hotels worldwide through the Booking.com, priceline.com and Agoda brands. In the United States, the Company also offers its customers reservations for car rentals, airline tickets, vacation packages, destination services and cruises through the priceline.com brand. It offers car rental reservations worldwide through rentalcars.com.

Tourism is a trillion-dollar industry, and Priceline.com Incorporated rules this space. Priceline's stock had a stunning performance over the last five years. It has been very successful in capturing the huge business opportunities presented by e-commerce in the last decade.

Performance Check

Sales during the quarter ended on March 31 increased by an impressive 26%, to $1.64 billion, versus $1.3 billion in the first quarter of 2013. The figure was above analyst's expectations in the area of $1.63 billion.

Gross travel bookings -- the total dollar value of travel services purchased on the platform -- came in at $12.35 billion during the quarter, a big increase of 34% versus the prior year. Priceline booked more than 83 million hotel nights during the quarter, an annual increase of 32%.

The business is performing remarkably well on the international front: International bookings increased by 37% versus the prior year. According to management, sound performance reflects, "increased penetration of core Western European and North American markets, but also very attractive growth in newer markets, including Eastern Europe, the Middle East, South America, and the Asia-Pacific region."

Adjusted earnings per share came in at $7.81, a big 36% increase, versus $5.76 per share in the first quarter of 2013, and comfortably above analyst's estimates of $6.93 per share. Guidance was lower than anticipated, though. Priceline said it's expecting an increase of between 22% and 32% in gross travel bookings for the second quarter of the year. This is a fairly wide range, and also a deceleration versus a 34% growth rate in the most-recent quarter.

Gross margins have improved over the years, from 21.7% in 2004 to the highest-ever level of 84.1% in 2013. Operating margins also improved over the years, from 3.3% in 2004 to the highest-ever recorded level of 35.5% in 2013.

However, Priceline is well-known for providing conservative guidance and consistently delivering above those numbers, so the company's guidance is probably too modest if history is any guide.

The Story So Far

Priceline’s growth in recent years has come from its expansion initiatives in international markets, primarily Europe. The company bought out the online travel agency Booking.com in 2005, which grew to become the market leader in Europe with over 30% share in 2012. Priceline is now aggressively targeting high-growth international regions such as South America and Asia-Pacific. This helped the company to register 37% year-on-year growth in international gross bookings in Q1 2014, and it is believed that international markets will continue to be the primary growth driver for Priceline in the near future.

The company launched its first offline advertising campaign (Booking.yeah) for Booking.com in the U.S. last year. It entered into a partnership with NYC and Co. to power bookings on New York City’s official tourism website. It also completed the acquisition of Kayak (KYAK), the leading meta-search engine in the U.S. with over 50% share of the travel search market to gain more visibility in the U.S. market.

All these initiatives have helped Priceline to accelerate domestic gross bookings growth in the last few quarters to high-teens to 20s from high-single-digit to low teens. We expect the domestic business to demonstrate continued strength for the rest of the year.

Growth Opportunities

Priceline is hardly a U.S. online travel company, as $10.6 billion of its $12.3 billion in total bookings came from international markets, which can be attributed to Booking.com. Also, mobile is growing fast in international markets, as Booking.com's mobile accommodation bookings grew 160% last year to $8 billion, a market that's expected to keep surging.

Priceline has made many successful acquisitions of international companies, which is one reason its return on assets is so high. From the international markets, Priceline created 94% of its consolidated operating income last year.

The international markets are much more fragmented, and Priceline remains one of the few dominant players. Meanwhile, the U.S. is much smaller, with a few key leaders who are all battling for supremacy, which makes for higher costs and spending to gain an edge.

One of Priceline's biggest strengths is that it is geographically diversified, and this is expected to give PCLN continued growth in coming years. With operations in nearly 200 countries, the company has huge penetration in the developed countries of Europe and North America, and it is also present in the rapidly developing emerging regions of the world. PCLN was a late entrant in the North American market, but it is doing well and capturing this vibrant tourism market.

On a Concluding Note

Priceline delivered truly impressive results for the first quarter of 2014, and the company continues consolidating its leadership position in the online travel industry. The way things are going for the company, investors have solid reasons to expect sustained growth from Priceline in the years ahead.  Financial discipline is an important strength that has helped Priceline to thrive. The company is a proactive genius that knows how to surprise and delight customers with its offerings. Priceline has ruthlessly pursued every growth opportunity to stay ahead of its competitors.

With a market cap of about $61 billion, Priceline Group is the world’s most valued travel company. I am quite bullish about this company and believe that it is going to create greater shareholder returns.

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