Priceline: Earnings Upside Still Obvious, Valuation Still Compelling

| About: The Priceline (PCLN)


Easy comps in Q3 and Q4 suggest that bookings and gross profit growth is unlikely to slow down and that Priceline’s Q3 guidance is overly conservative.

Current margin resilience gives confidence in Priceline’s ability to preserve its margins going forward while investing in new segments and growing revenues at a fast pace.

Valuation (20.5x 2015 EPS) remains undemanding in view of a 20% earnings CAGR.

Quarterly guidance offers obvious upside, once again

Beating quarterly expectations (Q2 EPS of $12.51 vs. consensus $12.06) and guiding conservatively ($19.60-21.10 EPS vs. consensus $21.26) has now become a ritual for Priceline (NASDAQ:PCLN). Consequently, we wouldn't pay too much attention to the soft Q3 guidance and would rather focus on Q2 metrics and try to figure out what they suggest for the company's short-term outlook.

Growth in international bookings (Priceline's main source of revenues) and in hotel room nights (Priceline's main vertical) remained elevated in Q2 (+35% and +29% respectively) while domestic bookings slightly accelerated vs. Q1 (+20.6%), showing that the U.S. business is continuing to gain traction.

Interestingly, comps will be easier in Q3-Q4 for both international bookings and hotel room nights. This suggests that the slowdown expected by Priceline in Q3 (bookings growth guidance of 19-29% vs. 34% in Q2 and gross profit growth guide of 21-31% vs. 36%) is unlikely to happen and that the company is on track to beat expectations once again.

Long-term outlook is compelling

On top of strong bookings and gross margins, Priceline displayed a resilient EBITDA margin in Q2, down only 100bps year-on-year to 37% and 4% above consensus despite significant marketing spending. This, combined with Expedia's (NASDAQ:EXPE) EBITDA beat, suggests that competition in the industry does not get out of control and that cost efficiencies and leverage on IT investments offset most of the increased marketing spend to promote revenue growth.

In all, this gives confidence in Priceline's ability to preserve its margins going forward while investing in new segments (vacation rental, restaurant booking with OpenTable…) and growing revenues at a fast pace. We are highly confident that the current revenue growth trend (20-30%) is sustainable as Priceline gradually turns into a comprehensive online booking service and as the online opportunity is still huge. Believe it or not but in the U.S., the online channels just have a 41% share of travel bookings according to PhoCusWright, leaving significant scope for growth. And the opportunity is even bigger outside the U.S. where online channels have a 32% share.

Pretty good visibility comes at a decent 1x PEG

Even if we do not expect any margin leverage in the short term as Priceline continues to invest aggressively, we would expect earnings growth to reach a 20% CAGR in coming years driven by revenue growth. Against this backdrop, we view the stock's valuation as attractive. Priceline is indeed trading at a 2015 P/E of 20.5x, suggesting a PEG of only 1x.

Note that Expedia is trading with a discount (2015 P/E of 16.5x) to Priceline but we believe this is justified by a lower revenue growth outlook: Expedia is mainly a play on the more mature U.S. market while Priceline is mainly an international play with a large exposure to Europe where the economy is gradually improving.

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