20% Upside Potential In Priceline

Aug.12.13 | About: Priceline Group (PCLN)

The Priceline Group (NASDAQ:PCLN) is a leader in global online travel reservations and consists of five major brands - Booking.com, priceline.com, Agoda.com, KAYAK and rentalcars.com along with other ancillary brands. The Priceline Group provides online travel services in over 180 countries. Booking.com is the leading global online hotel reservation service offering more than 330,000 hotels and accommodations in 41 languages.

Second quarter 2013 financials

Priceline reported [pdf] second-quarter results that exceeded analysts' consensus estimate and continued to expand its market share in international markets outside the United States. The company earned $9.70 per share without adjusting for exceptional items, which was 24% more than the same quarter of the previous year and $0.34 per share more than the consensus analysts' estimates. In the first quarter of 2013, Priceline was $0.49 per share ahead of these estimates and $0.23 per share for the last quarter of 2012. Revenues at $1.68 billion grew by 27% year-over-year against the consensus estimate of $1.65 billion. The gross profit for the 2nd quarter at $1.38 billion represented a 37.8% increase over the previous year. International operations report of a gross profit of $1.2 billion, a 39.7% increase in comparison to the same quarter of the previous year. Non-GAAP net income came to $508 million a growth of 25.6% increase over the previous year.

Strength in Europe was noticeable especially in the Booking.com unit, which handles hotel reservations in Europe and is based in Holland. The acquisition was made when online travel was just gathering momentum in Europe and prospered because its services were available in different languages and it pioneered the sale of discount hotel rooms on the Internet. It has the largest inventory of hotel rooms for sale in Europe and added 30,000 more rooms in the second quarter. It also offers an attractive value proposition for hotels because it charges the lowest commissions in the industry. Morgan Stanley reports that Booking.com has increased its market share from 45% to 47% and that the gain came largely at the expense of competitor Expedia (NASDAQ:EXPE), which has seen shares stay flat at 13%.

For Priceline as a whole, gross bookings (measured by the value of all services sold) in dollars grew by an impressive 38% to over $10 billion with international growth rising by over 44% and domestic growth in the United States by 11.7%. Globally, hotel reservations grew by over 38%, airline ticket bookings by 1.8% and car rentals by 46.3%. JPMorgan analyst Doug Anmuth believes that Priceline is the company that is in the best-position in the online travel business and will continue to grow market share internationally. He also says that the macro economic conditions in Europe are stabilizing and will contribute to a larger share of hotel bookings and expects Asia Pacific and Latin America to contribute more in the future. Ascendiant Capital Markets analyst Edward Woo notes that the company has built up substantial momentum for future growth. As a measure of diversification, Priceline acquired travel search engine Kayak Software Corp. for $1.8 billion in May.

Third-quarter 2013 guidance

For the third quarter of 2013, the company expects to achieve an EPS in the range of $15.30 per share to $16.30 per share. The consensus forecast is $15.86 per share. It is aiming to achieve a year-over-year growth of between 27% and 34% in aggregate gross travel bookings of which between 32% and 34% will be in international bookings and between 5% and 10% in domestic bookings. An increase in revenue from the prior year is targeted at between 23% and 30% and an increase in gross profit of between 32% and 39%. The target for adjusted EBITDA is approximately in the range of$990 million and $1,055 million.

The bottom line

Priceline has established a foundation for solid future growth and its performance during depressed conditions in Europe suggests that it will do even better when economic conditions there improve. The stock currently trades at $969.89 and the consensus analysts' mean target price is $1,105.65 and the median price is $1,100. However, given the growth potential, I believe that the potential upside is more than 20% and recommend that investors consider PCLN in the consumer goods and services sector.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.