Fairly Valued?

by: Derastone

Company Overview is an online travel agency (OTA) in the business of offering airline tickets, hotel rooms, rental cars, vacation packages and cruises. The Priceline Group operates four primary brands, Booking, Agoda (in Asia), and TravelJigsaw.

During the year ended December 31, 2009, their international business — the significant majority of which is currently generated by — represented approximately 61% of their gross bookings and approximately 75% of our consolidated operating income. Given that PCLN’s international business is primarily comprised of hotel reservation services, commissions earned in connection with the reservation of hotel room nights has come to represent a substantial majority of their gross profit.

Investment Thesis
We strongly believe that the strong secular growth of online travel will continue at the expense of traditional channels and it is driven by convenience, value-priced, selection, and consumer experience. Long-term growth drivers are in place for the company including:

  • Penetration of European online travel
  • Strong demand for intra-Europe hotel transactions
  • The introduction of new services and expansion of service offerings into new markets
  • Increasing contribution from international markets, which are exhibiting robust growth
  • Supplier friendly model with differentiated product
  • Probably the best managed company in the U.S. travel sector
  • Consistent execution and acquisition strategy

Priceline has the opportunity to leverage its brand and business model to gain traction in North America and Asia given its leadership position in the European travel market. In the US, Priceline's “Name-Your-Own-Price” (opaque) booking service should benefit from consumers seeking value-priced travel in an uncertain economy. PCLN continues to gain share in the online travel industry, results obtained because of management disciplined operating expenditures (opex) spending.

Competitive Advantages

  • Product differentiation: a heavy hand in marketing (“Priceline Negotiator”)
  • Larger footprint in a fragmented European market provides significant barriers to entry, which leads to wider margins
  • Direct hotel connections (100K), resulting in higher profit margins given that they are outside the GDS network


  • Macroeconomic: economic uptick in Europe and North America enabling a much larger population to book travel
  • Value realization of Agoda which is operated as a merchant model but creates a first-mover advantage as a point of sale website; Asia online leisure travel opportunity is still in a nascent stage as compared to Western Europe – both in terms of market size and growth rate.
  • Response from the Dutch tax authorities as to what percentage of earnings will qualify for this lower tax treatment.

Valuation, and Comps
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Jeffrey Boyd has held Priceline's CEO position since 2002. An $80 million company when Boyd took the helm, it's a more than $10 billion business today, with attractive growth potential still remaining. Insiders own about 1.5% of shares outstanding, which represents about $160 million in value. On the downside, PCLN possess a poison pill provision that could significantly dilute shareholders and/or prevent them from benefiting from a buyout attempt at a premium to its current price.


  • Slower international growth could bring down its premium valuation
  • Leisure travel industry slowdown given worsening economic conditions
  • Concentration of travel suppliers – “Name Your Own Price” was approximately concentrated 68.5% in the largest five hotel suppliers and 76.7% in the top five suppliers of air tickets
  • Competition ramping up Declines in European hotel average daily rates (“ADR”)

Disclosure: No positions