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Summary

  • Priceline surprised on earnings Monday, bringing in earnings of $12.51 per share over analyst estimated of $12.04 for the quarter.
  • The company lowered its outlook for 3Q14 based on expansion costs.
  • Weak economic conditions going forward could have a negative effect, but Priceline is still priced well for its growth, making the company a good long position.

Priceline (PCLN) saw a strong rise on Monday after posting better than expected profit. The online travel booking company reported a rise in net profit of 32 percent to $576.5 million, or $10.89 per share, for 2Q14. The company earned $12.51 per share, excluding items. Analysts had expected earnings per share of $12.04 for the quarter. Priceline disappointed on outlook, estimating an adjusted profit of $19.60 to $21.10 per share for 3Q14 due to expenses related to expansion; analysts had predicted $21.28 per share.

Shares in Priceline rose just over 2% in trading Monday, moving from an open of $1,281.56 to finish the day at $1309.28.

Investment Thesis

Priceline has strong opportunities ahead and it appears to be underpriced compared to its largest rival. The company has its work cut out for it as the US and global economies begin contraction, but those factors will affect all companies in the travel sector, but the strengths should outweigh the weaknesses, making Priceline a good long position.

Expansion

Darren Huston, President and CEO of the Priceline Group, said the company is focusing on customer experience, content expansion, and market penetration. He continued by saying that he believes Priceline's expanded partnership with China's Ctrip and its June acquisition of OpenTable would help the company achieve those directives.

"Priceline said last week that it would invest $500 million in China's Ctrip.com International to give customers access to more than 100,000 places to stay in the Greater China region," says Reuters. "Priceline bought restaurant reservation website OpenTable in June in an attempt to become a one-stop shop for travelers. The company, which plans to increase its investment in OpenTable in the third quarter, has launched mobile apps to reserve tables through OpenTable in New York. Priceline said it would launch the app in 20 U.S. cities before the end of the year."

The strategy is a smart one. Domestic travel sales trail global travel sales, expanding into domestic food reservations would help Priceline fill the gap and the company's enhanced relationship with Ctrip plays on the company's already strong international travel numbers.

Economic Outlook

However, travel is highly dependent on the performance of the economy. While some things have gone well lately - for instance, US unemployment declined by 1.1% over the past 12 months - the outlook for the US economy and the broader global economy is not so strong.

"After the 2012 slowdown global economic growth is expected to pick up gradually through 2017. Nevertheless, growth is still expected to be lower than in the five years prior to 2008, and a number of concerns still weigh heavily on these forecasts," reports Dun and Bradstreet in a report published last year. "Slowdowns are anticipated in North America in 2013 and 2015, Asia/Pacific in 2016, and Latin America in 2017."

The US economy has been stuck at a 2% growth rate over the past few years and the IMF says that it will continue to grow at that rate in 2014, revising a previous estimate of 2.8%. In May, World Bank said that it too is cutting its prediction for both the US and global economy. The OECD echoed the concerns of its fellow agencies, predicting that the US economy will peak in 2015 before starting a steady decline that will last through to 2060.

A weaker economy means less disposable money from the world's more budget-conscious consumers (aka the ones using travel sites like Priceline), and less disposable money means less travel.

Competitors

That said, the $68 billion market cap Priceline is strong amongst its competitors. Compared to rival Expedia (NASDAQ:EXPE), the company is underpriced. Priceline is priced at just 20 times its forward earnings and enjoyed 40% revenue growth for fiscal 2013. The company's share price is up 32% over the past 52 weeks, while the S&P 500 rose just 14.2%. In addition, analysts are encouraged. The consensus puts a one year price target of $1,441.08 on the company, a projected increase of over 10%.

In comparison, its largest competitor Expedia has a $10.68 billion market cap and is priced a little lower at 18 times its forward earnings but had considerably less growth last year, posting revenue gains of roughly 23%. Nevertheless, Expedia has climbed over 66% in the past 52-weeks. The company is currently priced at $83.94 per share with a one year price target of $88.33 - a projected gain of just over 5%.

Orbitz (NYSE:OWW) has a market cap of less than $1 billion and is priced in the middle of the three companies, with a forward PE of 19, but it is grossly down, falling 24.53% over the past 52-weeks. Analysts expect Orbitz will gain roughly 8% over the next year, moving from its current share price of $8.88 to $9.58.

Takeaway

Priceline is priced higher relative to its forward earnings but it has stronger growth prospects than its rivals and an expansion strategy that should allow the company to take advantage of favorable market conditions while they last. Priceline would make a good long term position for someone looking to invest in the budget travel industry.

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

Source: Priceline: Underpriced After Strong Earnings, Disappointing Outlook

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