If you know nothing else about The Priceline Group Inc. (PCLN, Financial), you probably know it as a company that does not split its shares. That’s apparent from a share price of more than $1,400, and behind the big share price stands a big travel company that brings in big earnings.
Source: Home page of www.priceline.com
You may also know Priceline as home of Name Your Own Price®, but today it’s much more than that. It is a strategically developed group of companies that will book your online travel, put you into a hotel, rent you a car, make your restaurant reservation and more.
What’s more, Priceline is a company that has consistently increased its earnings year over year. But at the moment, the share price does not reflect that earnings growth, and that’s why we find this name on the Undervalued Predictable screener list at GuruFocus.
In this article, we look at what the company is and how it has done and reflect on several conflicting valuations.
History
1997: Jay Walker founds Priceline and promotes it with the slogan, “Name Your Own Price®.”
1999: Initial public offering (IPO) on NASDAQ, becomes one of the hyper-priced dot.com stocks.
2002: Jeff Boyd becomes chief executive officer.
2004: Enters the retail hotel business by buying a majority stake in TravelWeb.
2005: Buys Booking.com, the leading hotel booking website in Europe.
2007: Buys agoda.com, a leading hotel accommodations service in Asia.
2013: Buys global travel search tech company KAYAK.
2014: Changes its name to The Priceline Group, having become a company with multiple independently operated brands.
2016: Fast Company calls it a “world’s most innovative” company.
What this history does not show, so far, is the collapse and recovery of Priceline after the dot.com crisis. This was a period when many bright, new Internet companies erupted onto the market, briefly enjoyed astronomical valuations, then plunged right back down the charts. Many were wiped out completely.
But as Henry Blodget wrote in a 2013 Business Insider article, Priceline managed to survive despite its history:
“Way back in the 1990s, this company was the hype machine to end all hype machines.
“It went public in a massive IPO, and its stock valuation immediately shot up to nearly $50 billion.
“But then the numbers collapsed.
“And so did the hype.
“And so did the stock.
“And so did the company.
“A couple of years after the peak of the dot.com boom, the company's stock had fallen 99%. And the company itself had been left for dead.
“But then an amazing thing happened.
“The company found a management team that was less interested in 'buzz' and 'ideas' and 'stories' than it was in actual performance.
“The company stabilized its business, and then went looking for a new growth engine.
“And found it.
“And, now, a decade later, with shockingly little fanfare, the company's value is about to exceed the level it hit back in the wild dot.com days.
“The company, in other words, is about to be worth $50 billion again.”
Except where noted, this history is based on information at the company website.
Comments: A compelling back-story about a dot.com company that survived, but we note the company has quite a story about acquisitions as well, not all of them included here.
Priceline’s business
If you’re a traveler, you will at least recognize the Priceline name, and the odds are pretty good you’ve used one of the companies within the group.
The company refers to its business this way: “Through our online travel companies (OTCs), we connect consumers wishing to make travel reservations with providers of travel services around the world.” (Unless otherwise noted, all information in this section comes from the company’s 10-K for 2015.)
It does business through several brands:
- Booking.com “offered accommodation reservation services for over 850,000 properties in over 220 countries and territories on its various websites and in 42 languages, which includes approximately 390,000 vacation rental properties.” This is the international operation.
- Priceline.com: “We offer consumers hotel, rental car and airline ticket reservation services as well as vacation packages and cruises.” Home of Name Your Own Price® and Express Deals®. This is mainly a domestic (American) operation.
- KAYAK “provides an online price comparison service (often referred to as 'meta-search') that allows consumers to easily search and compare travel itineraries and prices including airline ticket, accommodation reservation and rental car reservation information from hundreds of travel websites at once.”
- Agoda.com: “Online accommodation reservation service catering primarily to consumers in the Asia-Pacific region with headquarters in Singapore and operations in Bangkok and throughout the region.”
- Rentalcars.com “offers a primarily merchant, online retail and opaque rental car reservation service allowing consumers to make rental car reservations in approximately 46,000 locations throughout the world with customer support provided in 40 languages.”
- OpenTable “provides online restaurant reservation services to consumers and reservation management services to restaurants. OpenTable does business primarily in the U.S. although it intends to continue to invest in expanding its international offerings.”
Other
Chairman and CEO: Jeffery H. Boyd, age 59. Boyd served as president and CEO from November 2002 until December 2013. He returned to the CEO’s desk earlier this year after the sudden resignation of Darren Huston. Before joining Priceline in 2000, he was executive vice president, general counsel and secretary of Oxford Health Plans Inc.
Employees: On Dec. 31, 2015 the company employed 15,500 people with approximately 3,200 in the U.S. and 12,300 outside the U.S. It also uses independent contractors for functions such as customer service, website translation and system support.
Comments: Priceline Group comprises a group of distinct but interrelated companies that serve the travel and dining sectors.
Revenues
While Priceline operates six distinct companies, it classifies its revenue into three categories:
- Agency revenues: travel-related transactions in which Priceline is not the merchant of record and prices are determined by third parties. This includes travel commissions, reservation booking fees, travel insurance and customer processing fees. This category takes in almost all of Booking.com’s revenue.
- Merchant revenues: Priceline is the merchant of record and charges the customer’s credit card.
- Advertising and other revenues:Â from KAYAK’s referrals to other online travel companies and service providers, ads on KAYAK’s websites and mobile apps, OpenTable reservation fees, advertising on Priceline’s website and Booking.com’s accommodation marketing and business analytics services.
Agency revenues account for about 70% of revenues as this excerpt from the 10-K for 2015 shows:
Comments: In 2015, Priceline generated more than $9 billion worth of revenues on $55.5 billion of gross bookings, mainly through travel commissions and other income received from other companies.
Competition
In its daily battle for market share, Priceline faces competition from other online travel agencies as well as traditional bricks-and-mortar travel agents. It says its markets are extremely competitive.
Specifically, it has to contend with Expedia (EXPE, Financial), which also owns or operates multiple travel agencies including its namesake expedia.com, Hotels.com, Hotwire, Orbitz, Travelocity and more.
In the field of accommodation, it has to contend with Airbnb and HomeAway (also owned by Expedia).
Conventional travel agencies include Carlson Wagonlit, American Express (AXP, Financial), Thomas Cook and Tui Travel (TT., Financial), not to mention thousands of independent operations.
KAYAK’s price comparison service must compete with TripAdvisor (TRIP, Financial) and trivago (Expedia is the biggest owner of trivago).
Priceline also faces a new competitive front: Google, Apple (AAPL, Financial), Alibaba (BABA, Financial), Amazon (AMZN, Financial) and Facebook (FB, Financial). “For example, Google has entered various aspects of the online travel market through its acquisition in 2011 of ITA Software Inc., a major flight information software company, its hotel search and reservation booking business ('Book on Google') and its license of hotel-booking software from Room 77.”
Comments: No shortage of new and traditional competitors for Priceline in what has become a highly fragmented industry.
Moat
In its profile and analysis of The Priceline Group, Deerwood Capital, LLC posits four reasons why Priceline should continue delivering returns in the mid-teens over the next three to five years:
- A huge base of suppliers and travelers that includes 767,000 hotel properties and 80 million unique visits to its websites each month (this report was published in September 2015).
- An "increasing breadth of online travel offerings and related services" should allow Priceline to take incremental market share from global competitors.
- Multiple secular growth opportunities: Travel is growing faster than gross domestic product (GDP); an increasing number of travel arrangements will be made online, which favors Priceline,Ă‚ and travel will grow quickly in nondomestic markets where Priceline is strong.
- Good management: “Priceline’s senior management team has proven itself to be skillful at allocating capital and creating shareholder value.”
Comments: This summary by Deerwood argues Priceline will be able to hold its place because big supports big, more services, secular growth and good management.
Growth
Over the past 10 years, as this chart shows, Priceline has grown its top line from less than $2 billion to more than $9 billion:
The company has also grown its earnings before interest, taxes, amortization and debt (EBITDA) and earnings per share (EPS) over the past decade:
For the third quarter of this year, Priceline predicted, “Year-over-year increase in gross profit of approximately 15% to 20%” in its second quarter financial results.
Baron Funds had this to say about the company’s future: “We think Priceline has a long runway for growth, especially in emerging markets, where industry penetration levels are still much lower than in developed countries.”
Comments: The Priceline Group has enjoyed stellar growth on its top and bottom lines, and we would expect at least solid growth in future years.
Ownership
Twenty-three of the gurus followed by GuruFocus own shares in The Priceline Group. Frank Sands (Trades, Portfolio) has the biggest holding at 984,460 shares. Steve Mandel (Trades, Portfolio) and Dodge & Cox are the second- and third-largest holders.
Institutional investors, including many of the gurus, seem to love this company; they own 95.29% of the outstanding shares.
Insiders have a respectable proportion of outstanding shares, 2.58%. Still, there are some doubters with shorts holding 3.58%.
Comments: You have to have confidence in a company with such support from professional investors and fund managers.
Priceline by the numbers
Comments: Its share price is about 5% below the 52-week high; it has a strong return on equity (ROE) and does not pay dividends but did buy back 5% of its outstanding shares last year.
Financial strength
Priceline receives a middling score for financial strength and a strong score for profitability and growth in the GuruFocus system:
As is often the case with Undervalued Predictable stocks, long-term debt has shot up in recent years:
The company notes in its 10-K for 2015, “We have a substantial amount of outstanding indebtedness and we may incur substantial additional indebtedness in the future.”
But it does have the capacity to handle the debt. As we see in the financial strength image above, its interest coverage ratio is 18.8, which is good, and this chart shows free cash flow has grown along with the debt:
The same holds for EBITDA and EPS:
Priceline enjoys a 5-Star (out of 5) Predictability rating, which means it has consistently raised its earnings from year to year, providing further assurance the company will be able to handle its debt commitment.
Comments: The means to cover its indebtedness have grown along with debt, as revenues, free cash flow, and EBITDA have all increased.
Valuation
In its Analysis section, GuruFocus says “The Priceline Group Inc is more suitable for Earning Power Based valuation methods. This includes 1) median price-sales (P/S) value, 2) Peter Lynch fair value. The Median P/S value of The Priceline Group for today is $1,116.76. The Peter Lynch fair value of The Priceline Group for today is $1,271.75.” Both of these valuations suggest Priceline is currently overvalued.
Looking further, we check the Discounted Cash Flow fair value calculator, earnings based:
As the screenshot shows, this valuation is about 6% above the current valuation.
According to standard interpretations of the PEG ratio, Priceline is undervalued. The standard interpretation is that companies with a PEG below 1.0 are undervalued, 1.0 to 2.0 are fairly valued, and companies with a PEG above 2.0 are overvalued.
Priceline currently has a PEG of 0.85, suggesting undervaluation. However, GuruFocus reports the company’s PEG ratio over the past 10 years has ranged between 0.23 and 0.95. This means we really can’t depend on PEG to give us a reading on valuation.
GuruFocus also tells us the company has a 5-Star Predictability rating, and this gives us something solid on which to base a valuation. The rating means the company has consistently delivered increasing EBITDA over the past five years.
Assuming that consistency, we can expect the earnings to pull the share price up since that’s been the pattern over the past 10 years. Here’s a graph showing that relationship between the share price and EBITDA:
Looking at this chart we can see the emergence of a gap between EBITDA and the share price since early 2014. This, in turn, suggests Priceline is currently undervalued, and we might reasonably expect the share price to head higher.
Finally, the company bought back shares in 2015, which would make sense given the recently faltering share price. This suggests management thinks the shares are currently undervalued.
Comments: Our best guess is that The Priceline Group is currently undervalued and has the potential to go higher, pulled up by earnings.
Conclusion
Perhaps it is this power to keep generating big earnings — EBITDA growth of 33.20% per year over the past five years — that has it held in such high regard by institutional investors. When 95% of the company’s shares belong to these investors, we can’t help but notice.
Individual investors looking for capital gains might do worse that emulate the institutional folks on this stock. Although the share price has largely stalled over the past couple of years, Priceline’s earning power should pull it up eventually.
The company does not pay a dividend, nor would we expect it to given the potential to pursue acquisitions and expand organically. It has, however, bought back shares, about 5% last year.
It’s hard to think of a $1,400 stock as being undervalued, but that does seem a reasonable thesis for The Priceline Group.
Disclosure: I do not own shares in any of the companies listed in this article, nor do I expect to buy any in the foreseeable future.
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