Seeking Alpha
Growth at reasonable price, research analyst, newsletter provider, long/short equity
Profile| Send Message|
( followers)  

Priceline.com (NASDAQ:PCLN) looks solid to continue its move to the upside as the company has great catalysts for growth and is not overvalued. The main reasons to like Priceline.com is what the company is doing outside of the States. With the domestic travel market losing ground in its growth rates, the company has searched outside the USA for some solid potential with investments/acquisitions into two companies that we believe can supply strong upside to shares moving forward. The two major catalysts that we see for PCLN are their subsidiaries Booking.com and Agoda. These two initiatives along with decent value for a growth name will provide solid potential for the company moving forward. Further, these two fit well inside of the company's hotel booking platform, which provides very solid margins compared to car rentals, aircrafts, and cruises.

Let's first take a look at Agoda. In 2007, PCLN acquired Agoda, a Southeast Asian-based deals hotel booking website, for its Asia exposure. The company specializes in properties in Australia, China, Japan, Singapore, Thailand, and other Southeast Asian nations. Instead of the company growing organically, Priceline chose to acquire a company like Agoda to get exposure in these high-growth markets. The company has over 300K hotel bookings in total with around 10K offerings in China, which is only about half of eLong (NASDAQ:LONG) and 1/3 of Ctrip.com (NASDAQ:CTRP), who are the two leading Chinese OTAs. Further, Agoda also operates in other strong growth markets through Southeast Asia, which is a nice advantage for PCLN to be exposed to all growth markets throughout the area.

Additionally, Agoda is well positioned in other strong growth markets, such as Indonesia, Singapore, Malaysia, and Thailand. In 2011, these countries made up 12% of all Asia-Pacific (including Japan and Australia) online travel sales. Todau, that area makes up 14%, and we believe that these areas will continue to grow market share over low-growth markets like Japan and Australia. Additionally, Southeast Asians use online travel sites at strong rates with almost 50% of these travelers booking trips through online sources. In 2013, the market will be over $90B. Yet, where does Agoda rank in these areas?

According to Alexa, Agoda is the top travel site in Thailand and the 42nd overall most visited site. In Indonesia, they are ranked 131st overall, and 66th in Malaysia. They are also #1 in Singapore for online travel and 43rd overall. Finally, the company is 128th in the Philippines. As we can see, Agoda is a strong name in this area with a lot of online traffic, and PCLN is going to have a lot of success with the company as these areas continue to grow.

Another major growth initiative for the company is their division, Booking.Com. Priceline acquired Booking in 2005. At the time, the company was a small Western Europe hotel booking website, but today, it is the largest hotel booking website in the world. For PCLN, Booking gives them much needed exposure to the European markets. These markets continue to provide solid premium over the USA due to a number factors. Foremost, the European market is a fragmented landscape with less chains and more hotels that do not have the capability to attract clients to their own websites. Online portals that can attract clients are important for these hotels, and that is why OTAs play an even more important role in these industries. Further, the European market is expected to grow at 5% per year on average, which is due to higher growth levels in Eastern Europe. Finally, we can expect a strong cycle of growth for the company in the next 24 months as the company rebounds from a long recession/depression era.

Here is Priceline's latest on Booking:

Booking.com's platform now has over 330,000 hotels and other accommodations, up 40% over last year. Booking.com's growth in Europe has held up well this year, despite continuing economic and political uncertainty. We believe the steady international room night growth we have posted this year is driving market share gains. Booking.com continued its aggressive development of markets outside Europe. These markets continue to grow faster than the core European markets, contributing to more overall growth, as they become a larger percentage of the whole business. We are investing in growing hotel and accommodation supply and in marketing, including Booking.com's offline marketing experiment in United States, which we believe is contributing to the room night growth Booking.com is seeing in the U.S.

According to a survey by Morgan Stanley, Booking.com accounts for 47% of European online bookings while Expedia (NASDAQ:EXPE) only accounts for 21%. The company has tremendous market share in the continent. According to the analyst, the reason for their success is their agency hotel model, which was recently copied by Expedia. Through the agency model, Booking works directly with independent hotels as a travel agent, while Expedia works more with the chains as more of a vendor. This model is very helpful, as it allows Booking to have higher takes due to chains more easily creating their own demand and traffic on their own websites. Further, the company is moving Booking.com into the USA market to compete with EXPE's Hotwire for deals on hotels as well as moving into Australia. We believe that Booking will remain a very sharp asset that can provide strong growth.

These two initiatives can provide long-term growth for Priceline.com. We believe Agoda can provide 20-30% growth in revenue, consistently, for the next few years, while Booking can provide 10-15%, consistently, in that same timeframe. We foresee the company being able to grow total operating income by 15-20% per year with these strong growth initiatives in place (along with Kayak (NASDAQ:KYAK), which we did not even mention due to its well covered nature in other articles).

Below, we have provided a pricing model to showcase what we are seeing for the company that will provide potential upside to over $1200 per share over the next 12 months. We believe that these two initiatives for the company are the backbone of growth and can provide solid revenue gains.

Finally, while valuations are at a premium for Priceline, the company is not overly expensive as a growth stock. While the company has a 33 PE (well above the sub-20 level we like for adding longs), their future PE is at 20, which is not terribly high for a high-growth name. The key, therefore, is that growth remains strong. The PEG ratio sits at 1.6, which shows that growth levels are not strongly priced into shares as well. Overall, we believe that PCLN stock is well-positioned in both catalysts and valuations for more upside.

Price Target Analysis

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income

2280

2750

3200

3650

4100

Taxes

570

688

800

913

1025

Depreciation

85

95

100

105

110

Capital Expendit.

-65

-70

-55

-60

-75

Working Capital

455

455

455

455

455

Available Cash Flow

1275

1633

1990

2328

2655

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you.

The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current].

For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for PCLN: 8.4%

2013

2014

2015

2016

2017

PV Factor of WACC

0.9224

0.8509

0.7849

0.7240

*

PV of Available Cash Flow

1176

1389

1562

1685

*

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for PCLN: 3.4%

2017

Available Cash Flow

2655

Divided by Cap Rate

3.4%

Residual Value

77859

Multiply by 20167PV Factor

0.7240

PV of Residual Value

56368

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows

5812

PV of Residual Value

56368

Cash/Cash Equivalents

1762

Interest Bearing Debt

2252

Equity Value

61690

Step 5.

Divide equity value by shares outstanding:

Equity Value

61690

Shares Outstanding

50.76

Price Target

$1215

Source: Priceline Headed To $1215, Main 2 Reasons Why