By Matt Doiron
Britain is reviewing Priceline's (PCLN) acquisition of Kayak (KYAK) on antitrust grounds, with a decision expected next month. Kayak's shareholders have already approved the deal, less than a year after the company went public. Priceline grew its revenues by 22% in 2012 compared to the previous year, to a total of $5.3 billion; Kayak, for purposes of comparison, generated less than $300,000 in sales during the same period though its top line growth rate was considerably higher. So while the acquisition would certainly supplement Priceline's own growth rate, the company is performing nicely on its own and any delay or uncertainty regarding the deal should not be taken as too bearish (in addition to the fact that M&A actually tends to destroy shareholder value).
The company also improved its net margins over the course of 2012, with earnings rising 34%. Currently Priceline trades at 25 times trailing earnings, so the market is pricing in high earnings growth for several years. However, Wall Street analysts believe that investors are actually underestimating Priceline's prospects: their consensus estimates place the stock's value at only 15 times 2014 earnings, and at a five-year PEG ratio of 0.9. In total, Priceline grew its revenue at a CAGR of 29% and its net income at a CAGR of 66% between 2008 and 2012, so clearly growth rates are slowing as the company grows.
Priceline is one of the favorite stocks of legendary investor Julian Robertson's pack of "Tiger Cubs" named for Robertson's firm Tiger Management. Robertson himself was buying Priceline in the fourth quarter of 2012, closing December with 30,000 shares in his portfolio (see Robertson's stock picks). Billionaire Stephen Mandel's Lone Pine Capital was one such fund, with over $1 billion worth of Priceline stock at the end of 2012 (find Mandel's favorite stocks). Blue Ridge Capital, which is managed by Robertson's second in command John Griffin, reported owning a little over 550,000 shares (check out more stocks Blue Ridge owns).
Expedia (EXPE) and Orbitz (OWW) are two of the best peers to compare Priceline to. Expedia is actually valued at a premium to Priceline, with a trailing P/E of 31. On a forward basis it is expected to pull even, so analysts (and presumably investors) are predicting that its earnings will grow at a faster rate. The company is smaller, but its revenue growth in the fourth quarter of 2012 versus a year earlier was about the same as Priceline's. Orbitz has only been narrowly profitable, though its stock price has roughly doubled in the last year on market optimism. Its forward earnings multiple is actually higher than what we see at either Expedia or Priceline, and as a result we would avoid the stock.
We can also look at Kayak and at travel reviews focused site Tripadvisor (TRIP). While the level of Kayak's valuation includes the takeover premium being paid by Priceline, we once again see a steep differential between the trailing and forward earnings multiples as the sell-side is forecasting that an independent Kayak would grow its earnings per share significantly over the next couple years. We also see good revenue growth, as we noted earlier. Tripadvisor, which is a recent spin-out from Expedia, has also been growing nicely though about 13% of the float is held short. That stock is also pricy- the trailing and forward P/Es are 36 and 23, respectively- and perhaps short sellers doubt that the company can in fact growth that much faster than its peers.
We actually like Priceline compared with its peers, since even its high earnings multiples are generally quite a bit lower than what we see at those companies. In absolute terms we are more cautious; we have seen that the growth rates of revenue and net income in 2012 were down a bit from their longer-term averages, and regardless of acquisition activity it would only be logical for earnings growth to fall further as the company grows. We wouldn't want to put too much faith in sell-side projections, so we would recommend avoiding Priceline until the valuation situation improves or the company halts the slowdown in organic growth.