Priceline Group Inc. (PCLN, Financial) is a U.S.-based online travel giant that offers hotel room reservations over 295,000 hotels along with worldwide reservations for car rentals, airline tickets, vacation packages, destination services and cruises through booking.com, priceline.com, agoda.com, Kayak, rentalcars.com and the recently acquired OpenTable brands. Formerly known as Priceline Com Inc, this Norwalk, Connecticut-based company presently has a market cap of $54.22 billion and a PE (ttm) of 23.40. For the third quarter of 2014, the company reported revenue of $2.84 billion i.e a growth of 25% Y-o-Y, which helped the company to boost up its top line thereby giving a qoq improvement of 27.4% in its EPS.
Seeking inorganic growth
The year 2014 was noticeably a strategic year for Priceline wherein it further diversified its market operations by launching Fun Rides and acquiring OpenTab. Fun Rides is a premium car rental service that allows customers to choose from a lineup of luxury sedans, muscle cars, sportsters, convertibles, hybrids, and minis. These machines have been made available at 63 major markets across the U.S., thereby giving first mover advantage to the company and an increased exposure in the rapidly growing car rental market. In addition to that, the company further acquired OpenTable for $6.6 billion, thereby marking its entry into the online restaurant reservation business with an undisputed market share of 50% in North America. In the said region, it caters to around 24,000 restaurants out of its total customer base of 31,500.
In 2014, Priceline also managed to beef up its portfolio by making a massive investment of $500 million in its commercial partner Ctrip, which is the biggest Chinese online travel agency (OTA). The idea behind this investment is to increase cross promotions of each other’s hotel inventories travel services, thereby offering a comparative advantage to Priceline’s products within China and vice-versa. Given that China is the fastest-growing travel market in the world and that more than 95% of Priceline’s earnings come from hotel bookings, this move will ensure that the company takes a considerable leap to achieve wider global exposure and better revenue potential in the future.
Number crunching
Priceline Group played well to its strengths in the last quarter, where its bottom line increased by a good 27.5% when compared to the same quarter in the prior year. Despite the EPS of the company being announced at $22.16 for the third quarter, which is a significant increase from $17.30 last year, and the stock getting an A rating globally, Priceline’s stock remained an underperformer. The primary reason behind Priceline’s decline has been a weak earnings guidance for the fourth quarter. This triggered a sell-off in the stock, as investors rushed to book profits made during the year. Additionally, a falling Euro has also been at play, partly responsible for Priceline’s weak guidance. Since the company makes 88 percent of its bookings from outside the US, its margins have been hurt by a declining Euro.
However, investors should note that this decline in Priceline’s quarterly earnings is largely symbolic and does not actually indicate a strategic or permanent shift in the company’s operations. As a matter of fact, the stock will continue to experience considerable volatility.
Takeaway
Analysts continue to favor Priceline’s stock because of its competitive industry position and positive growth on the top and the bottom line. In addition to that, the fall in oil prices also indicates favorable phase for companielike Priceline and Expedia (EXPE, Financial). This is because a drop in the price of crude would have a positive effect on the price of jet fuel and, thereby, prompt the airliners to lower fares. Although the airliners have not yet passed on the savings to customers, one can expect such a move in the near term. Consequently, an increase in travel would benefit Priceline in the future.
There appears to be a lot of growth potential given that new areas are being explored such as vacation rentals and China outbound travel. With all else said, I would recommend buying Priceline on its way down.
