Priceline (NASDAQ:PCLN) has the unique distinction of joining the $1,000 stock price club. One might be concerned about buying such a hot stock. In this analysis, I show the market's expectations for a price of $1,080 for PCLN.
Table 1 below shows analyst expectations. The past five-year growth rate of PCLN is an impressive 48%. The next five years' growth estimate is a high 20.45% (five-year growth estimates are notoriously volatile).
Table 1: Analyst Forecast for PCLN as of Nov. 6, 2013
Click to enlarge images.
Source: Yahoo Finance.
Using two years of near-term EPS analyst forecasts and a long-term analyst forecast growth rate of 20.5%, Priceline's valuation is about $1,048.54. This is remarkably close to the current price of the stock. The valuation model shown in Table 2 shows a cost of capital (required return) of 12% and a long-term nominal GDP rate of 4% used in the AEG (abnormal earnings growth) model. Using current market price of $1,080, one can reverse engineer the long-term growth rate embedded in stock price. As shown in Table 2, the long-term growth rate obtained is 7.08%. This appears high for a company that has competition from other players, such as Expedia (NASDAQ:EXPE) and Orbitz (NYSE:OWW), just to name a few.
Table 2: Valuation Using EPS Estimates for PCLN as of Nov. 6, 2013
One can use a growth rate of 7.08% embedded in the stock price and back calculate the EPS and EPS growth rate. Tables 2 and 3 show the expectations embedded in the stock price. This shows that EPS growth rates are still high, at about 15.5%, even after 10 years (2024). Eventually, the model reaches a steady state growth rate of 7.08% (not shown here).
Table 4 shows the expectations built into the current market price. About 36% of market price (PCLN at $1,080) is obtained from long-term forecast. This is the speculative part, where a long-term growth rate of 7.08% embedded in the stock price appears high.
So, Priceline's current stock price of $1,080 has an embedded expectation of a high growth rate of 7.1% that lasts forever. Current valuation reflects this optimistic scenario already. To justify the current stock price of $1,080, Priceline has to deliver an EPS growth rate of 15% or more for the next 10 years.
Table 3: Market's Implied EPS Growth Rate for PCLN Is High as of Nov. 6, 2013
Table 4: 36% of PCLN's Market Price Is From the Long-Term Forecast as of Nov. 6, 2013
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.