Priceline.com (PCLN) is an online travel aggregator that offers booking services for hotel rooms, airline tickets, rental cars, cruises, and other vacation packages. PCLN had gained near 20% and closed at $672.72 on January 18, 2013 since our last coverage on the stock published on October 22, 2012. In this article, new updates and a new options strategy will be presented and reviewed for Priceline.com.
7 Bullish Factors
- International focused. Priceline.com has stronger international presence with stronger growth rates comparing to its more domestically focused rival Expedia Inc. (EXPE). In the past 5 years, gross bookings and revenue grew at annual rates of 46% and 31% for PCLN, respectively, which were much higher compared to Expedia's rates in teens. The analyst at BofA Merrill Lynch, Justin Post, indicated "Aided by an increasing mix of APAC (Asia Pacific), LATAM (Latin America), and Booking.com's U.S. bookings, we see a company with an attractive growth profile, estimate upside potential and a reasonable multiple with room to expand. If Europe were to recover in 2H, Priceline is the most exposed in our coverage group as a percentage of profit."
- Improving holiday pricing. December, 2012 holiday airfares continued to creep upwards. The national average holiday airfare is $469, or 4% more expensive than airfares at this time in 2011.
- In-line guidance. Priceline's 2012 guidance was in line with analysts' estimate. Priceline.com expected revenue to grow year-over-year by approximately 15-22%, adjusted EBITA to range between $381 million and $421 million, GAAP EPS of $5.39-$45.84 per share and non-GAAP diluted EPS of about $6.12-$6.57 per share.
- Expansion through acquisition. Priceline had won anti-trust approval to buy Kayak software Corp as said by Federal Trade Commission on January 8, 2013. Kayak software offers a website and mobile applications to help consumers compare prices for airline, hotels and rental cars. The transaction valued Kayak at $1.8 billion. Kayak's search data is valuable for Priceline while Kayak's mobile applications should help Priceline compete on the mobile end. This acquisition will help both Priceline and Kayak expand internationally while Kayak can also get deeper into the hotel business.
- Analysts' calls with upside potentials. On January 16, 2013, Barclays reaffirmed their overweight rating on PCLN with a $750 target price. Zacks reiterated a neutral rating with a $688.00 price target on January 14, 2013. Lastly, Bank of America upgraded PCLN to a buy rating from a neutral rating with a $770 price target, up previously form $690.00.
- Fundamentally, PCLN has a very healthy balance sheet with $4.67B total cash and $1.45B total debt. PCLN also generates an operating cash flow of $1.57B with a levered free cash flow of $1.25B. PCLN has strong revenue growth (3 year average) of 32.2 and EPS growth (3 year average) of 76.7. PCLN has higher operating margin of 34.8%, ttm, and net margin of 26.8%, ttm, comparing to the industry averages of 13.4% and 9.1%, ttm, respectively. PCLN generates higher ROE of 45.5, as compared to the average of 10.1.
- Technically, the MACD (12, 26, 9) is showing a bullish trend while the RSI (14) is indicating a strong bullish momentum at 68.24. PCLN is currently trading above its 200-day MA of $645.39 and 50-day MA of $639.20.
President & CEO sold shares. Boyd Jeffery H, President & CEO of Pricelin.com, sold 2000 shares at $657.24 per share. Mr. Jeffery's holding continued to decline and currently held 173,080 shares as last reported on January 15, 2013.
Valuation concern. PCLN has P/E of 25.4, P/B of 9.4, and P/S of 6.8, which are all higher than the industry averages of 22.4, 2.1 and 2.1. PCLN's current P/E is also higher than PCLN's 5 year average of 25.1. PCLN has a forward P/E of 15.9, which is higher than S&P 500's average of 13.3. Nonetheless, PCLN's high valuation can be partially justified by its high growth rate.
For bullish PCLN investors, a credit put spread will be reviewed which will allow investors to acquire PCLN stock with a safer entry point while gaining some upside potential.
- Short 1x April 20, 2013 put at the strike price of $600.00 for the credit of $15.60
- Buy 1x April 20, 2013 put at the strike price of $575.00 for the cost of $10.86
The maximum profit is $4.74, and the maximum risk/margin requirement is $20.26. If PCLN closes above $600.00 on April 20, 2013, 23.40% return on margin will be gained. If PCLN falls below $600 upon options expiration, PCLN will be acquired at $595.26, which is 11.51% lower than the current price of $672.72.
Note: All prices are quoted from the closing of January 18, 2013 and all calculations are before fees and expenses. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.