In mid-September, Priceline.com (PCLN) became the first stock to trade above $1,000 on Standard & Poor's 500 list. In our previous article on Priceline, we focused on its international expansion, which is mainly in Europe. In this article, we are focusing on its expansion strategy in the U.S., which is expected to increase its market presence. Its strong growth fundamentals will translate into a strong balance sheet for the company, which will be a key growth factor going forward.
Partnerships for increased presence in New York City
Priceline is creating a remarkable presence in Europe with its international expansion. In Europe, the company currently has approximately 47% market share in the online travel agency, or OTA, market. In the U.S., it merely had 11% market share in the OTA business last year. Priceline faces tough competition from Expedia (EXPE), which is a well-known OTA business covering 45% of U.S. market share.
To enhance its presence in the U.S., Priceline recently entered into a partnership with NYC & Company, New York City's marketing and tourism organization. This organization runs the city's official website, which promotes tourism in New York. Under this alliance, booking.com, a subsidiary of Priceline, will be the hotel booking engine on the official website. This will enhance booking.com's visibility. Travelers across the world visiting the city's official website will be able to choose from approximately 65,000 hotel rooms of New York City, which are available on booking.com.
Furthermore, NYC & Company is working to increase the number of visitors to New York City. It recently joined hands with Macy's (M), the world's largest department store, to enhance the tourist shopping experience. Approximately 6 million tourists visit Macy's store annually in New York, so choosing this store is a right move on the part of NYC & Company. Under this partnership, an NYC official information center, known as Herald Square Visitor Center, will open at Macy's stores across New York City. This center will include various facilities like information inquiry and ticketing services that will enhance the shopping experience of tourists. Moreover, Macy's will also provide 10% discounts to tourist across its stores in New York.
With this strategy, NYC & Company is expecting that the number of visitors in New York will increase from 50 million currently to 55 million by the end of 2015. This will also have a huge impact on the economic value of New York City, which is expected to surge from $55.3 million last year to $70 billion by the end of 2015.
So, what will be Priceline's benefit from these two alliances? We feel this will have a significant impact on the gross hotel bookings of Priceline due to enhanced presence and more tourists will be attracted to it from New York City & Company. With this, the management of Priceline has estimated that its bookings in the U.S. will grow in the range of 5% to 10% in the third quarter of 2013.
Strong balance sheet enhancing its future growth
In the second quarter of 2013, the company generated $593 million of cash through its operations, up 37% year over year. With this, Priceline ended up with $5.95 billion of cash and its equivalents. The company has $1.76 billion of long term debt and $532.2 million of short term debt. By deducting these from the cash balance, it has a net cash position of $3.65 billion. In our view, this huge net cash balance gives Priceline flexibility to expand its operations going forward.
Moreover, the company's low debt to equity ratio also depicts its strong balance sheet. Priceline's debt to equity ratio of 39.5% is significantly lower than the industry ratio of 92.66%. This low debt to equity ratio indicates that the company has managed its debt successfully as compared to the industry average.
Besides a huge cash balance and good management of its debt, Priceline's cost of capital is expected to witness a downfall, leading towards less expenditures by the company. Recently, the company issued senior unsecured notes worth of $1 billion and announced a stock buyback plan of $1 billion. Issue of senior notes and the stock buyback plan will transform the capital structure more towards debt than equity. This will reduce the company's taxable income, as interest paid on debt is tax deductible, leading towards reduced cost of capital.
The facts discussed above depict the company's strong balance sheet. Despite its strong balance sheet, Priceline pays no dividend to its shareholders. All the earnings are retained by the company for future reinvestment, enhancing its expansion flexibility, and adding value to its shareholders.
Priceline ahead of its competitors?
Despite Expedia's huge presence in the U.S. OTA, Priceline is ahead due to its various valuation metrics discussed below. In the second quarter of 2013, Expedia's earnings per share grew by merely 4.6% year over year as compared to Priceline EPS growth of 37% year over year.
As far as the earnings surprise of both the companies is concerned, out of last four quarters, Expedia has missed analyst expectations (cited in Yahoo Finance) in its two quarters with an average earnings downside of approximately 3%, whereas Priceline is beating the analyst EPS expectations with an average earnings surprise of approximately 5% in the last four quarters.
Henceforth, with Priceline's fundamentals (discussed above) and valuation metrics, we believe Priceline is ahead of its competitors.
Priceline, a leading online travel company, will give tough competition to its competitor with its strategy to expand in the U.S. market. It also has a competitive edge over Expedia when it comes to valuation metrics.
Furthermore, the company has a strong balance sheet with a huge cash balance that will give the company flexibility to expand its operations going forward for future profits. Although the company doesn't pay dividends, its capital has appreciated by 71.73% in the past year, which has added value for shareholders. These factors make us continue our buy rating for the stock.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article