Why Is Priceline More Expensive Than Expedia?

Includes: EXPE, PCLN
by: Mark Krieger

Why is there such a massive valuation "disconnect" between the two leading travel sites? After all, you wouldn’t think a company that actually has higher sales would possess a market cap so low in comparison, yet Priceline’s (NASDAQ:PCLN) market cap of $21 billion is triple that of Expedia’s (NASDAQ:EXPE) $7 billion valuation. On a price earnings basis, PCLN’s forward multiple of 33 times its 2010 earnings estimates of $13.22 is rich in comparison to EXPE’s bargain basement multiple of 15.

Tremendous runs: In the last two years, both EXPE and PCLN have had mindboggling runs, with EXPE more than quadrupling , and PCLN really taking the top prize by garnering a dizzying six fold rise in its share price. There is no doubt that the rocket climbs were attributable to a mammoth improvement in their respective fundamentals, but don't forget, the stocks also received help from a steady stream of decimated shorts being forced to cover their positions (Yes! I was one of those casualties), as well as an overall stock market that nearly doubled in the same timeframe.

Balance sheets: From a pure cash basis, PCLN wins hands down, as its cash hoard of about $1 billion (after deducting debt) is impressive. EXPE strikes out in this category, as its cash position is essentially negated when you factor in its debt load. The area where EXPE prevails is relativity to book value, as PCLN is selling at a lofty 13 times its book value while EXPE’s ratio is mere 2.5 times its shareholder’s equity.

Analyst price targets: The one year mean target price on PCLN is $442 (implying a lowly 1.6% appreciation clip) while EXPE’s mean target of $31.75, represents a 28% boost to its stock price (a factor 17 times higher than PCLN’s). Obviously, the market must believe that PCLN’s target price is too low, for its potential appreciation to be so minimal, so analysts are likely to ramp this up once earnings are released.

PCLN’s 4th quarter results will be released on February 23rd: Analysts are expecting PCLN to report another blowout quarter. Earnings of $3.10 on sales of $737 million are forecasted, however, PCLN has beat expectations by an average of 18% in the last two years, so a whisper number closer to the $3.66 mark, seems appropriate, which would translate into a juicy 84% earnings jump.

There is no doubt that the bar has been set extremely high, but management has been notorious for under promising so they can over deliver. As long as the company can meet its whisper number and maintain favorable guidance, the shares will not only fall out of orbit, they will likely go higher.

Growth rates: EXPE is expected to grow its earnings 16%, while PCLN’s 33% rate is far superior. PCLN is expected to earn 37%, more than EXPE, so all things being equal, shouldn’t PCLN’s market cap be only 37% higher than EXPE’s? That scenario puts PCLN’s market cap at $9.59 billion versus the $21 billion number it is sporting today. Analyzing the two travel portals from a PEG perspective (a ratio used to determine a stock's value by taking in account earnings growth), EXPE’s PEG ratio of 1.0 is far better than PCLN’s 1.42 read (a reading below 1 indicates an undervalued situation.)

I wonder if William Shatner has rung up the cash register on some of the shares he has accumulated as payment for being the company’s spokesperson. If you do some crude cocktail napkin math, it seems that the actor has conceivably reached the magical billionaire status milestone -albeit on paper. Kudos to you, Captain Kirk, for also becoming a "Captain of Industry"; now it is time to start monetizing those profits.

Bottom line: You get what you pay for. PCLN is clearly the superior company, but should it be, by as much as Mr. Market is giving it credit for? Probably not, because in the long run, their respective market cap differences should begin to contract, as PCLN’s share price decreases and EXPE’s increases. The converging of their market caps will result in PCLN’s market cap advantage dropping from three fold to twice that of EXPE. My best guess: PCLN is destined for a 20% haircut while EXPE should climb the same amount or more.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.