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Monday after the bell, internet travel site Priceline (NASDAQ:PCLN) will report earnings for its fiscal 3rd quarter. After a series of disappointments from high-growth names such as Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX), and Amazon (NASDAQ:AMZN). Priceline needs to deliver a good report or it will see its shares drop like the others have. Heading into the report, here's what to look for.

Current Expectations

When reporting last quarter's earnings, the company provided the following guidance for this quarter:

  • Year-over-year increase in total gross travel bookings of approximately 47% - 52%.
  • Year-over-year increase in international gross travel bookings of approximately 62% -67% (an increase of approximately 49% - 54% on a local currency basis).
  • Year-over-year increase in domestic gross travel bookings of approximately 8% to 13%.
  • Year-over-year increase in revenue of approximately 37% to 42%.
  • Year-over-year increase in gross profit of approximately 54% to 59%.
  • Adjusted EBITDA of approximately $595 million to $615 million.
  • Non-GAAP net income of between $9.10 and $9.30 per diluted share.
  • GAAP net income of between $8.37 and $8.57 per diluted share.

Analysts are currently expecting $1.42 billion in revenues, growth of 41.4% over last year's period. That is at the upper end of the range provided by the company. Analysts are expecting $9.30 in Non-GAAP earnings per share, which is the top end of the company's range. Last year's quarter saw $5.33.

For the fiscal fourth quarter, the current estimates call for $997 million in revenues, which is 36.3% year over year growth. EPS estimates call for $5.14 versus last year's $3.40.

Key Metrics

Here are some key metrics to look for:

(in millions except %) 3Q 2007 3Q 2008 3Q 2009 3Q 2010 3Q 2011*
Gross Margins 48.49% 56.28% 59.40% 66.50% 74.61%
Operating Margins 18.71% 22.78% 27.48% 33.62% N/A
Profit Margins 25.01% 15.04% 43.66% 22.26% 32.77%
Gross Bookings $1,391 $2,050 $2,723 $4,006 $5,985
International Bookings $789 $1,251 $1,724 $2,885 $4,746
Domestic Bookings $602 $799 $999 $1,121 $1,239

*Projection based on midpoint of company guidance. Operating Margin guidance not given by company.

As you can see from the chart, the main driver for Priceline is its international bookings, expected to grow at about 65% year over year. Domestic bookings are only expected to increase by about 10%. Priceline continues to improve its gross margins, which could break 75% this quarter. Operating margins should improve as well, and I would guess it would come in about 35% this quarter. I don't think they can get to 40% this year, maybe next.

Best Case Scenario

If all goes well, the company reports revenues of $1.45 to $1.5 billion. Gross Bookings top $6 billion. Gross margins top 75%, and profit margins top 35%. EPS comes in greater than $10. Company guides revenues to over $1 billion for next quarter, and EPS above $5.50. The company also announces a stock split. In this case, the stock will rise 7-12% on Tuesday, and we could see a run towards $600 later in the week.

Worst Case Scenario

Economic uncertainty scaled back travel. Revenues come in around $1.40 billion, and EPS is in the range of $9.25 to $9.50. The company guides to revenues below $1 billion and EPS around $5.00. No stock split is announced. In this case, company falls 8-14% on Tuesday. I've said for weeks that $475 is a good entry price, and we could easily see that. However, I don't think we'll see a retest of the October 4th low of $411, unless it comes out with a completely terrible report.

My Prediction

I think the company will beat on the top line, but not a complete blowout. I would go with $1.44 billion of revenues, slightly ahead of the $1.42 billion expected. Over the last 4 quarters, the company has beat on EPS by an average of 9.3%. That would imply about $10.15 for this quarter. I think they beat, but I'm not willing to go that high. I see a range of $9.70 to $10.00 for the number, so my midpoint would be $9.85. That's a comfortable 5.9% beat, although some may be expecting more. I expect guidance numbers will be in the $1.00 to $1.05 billion range with EPS guidance around $5.30 to $5.50. It will be a good quarter, but not a huge blowout. I don't see a split announcement coming this quarter. I see the stock rising 4 to 7% on Tuesday.

Valuation

Based on Friday's closing price, let's look at how Priceline compares to a few others in the industry. I'll compare it to Expedia (NASDAQ:EXPE), Orbitz (NYSE:OWW), and Travelzoo (NASDAQ:TZOO).

PCLN OWW EXPE TZOO
P/E (2010 actual) 38.06 19.87 16.69 37.01
P/E (2011 estimates) 22.74 74.50 14.40 21.46
P/E (2012 estimates) 17.61 19.87 13.07 17.22

As you can see from the chart, Priceline is rather expensive compared to the others when it comes to P/E multiples. Now, you can make the argument that because Priceline is the best of breed in its industry, people are willing to pay more for it. That is a valid argument. Priceline is currently expected to earn $29.15 in 2012. With a good report on Monday, I could easily see that number rising to $30. But that's only a 3% rise in earnings. If the stock rises more than 3%, the valuation will only get more expensive.

Conclusion

Priceline is expected to see a lot of growth in this quarter, and it must deliver. These high dollar, high growth names have been beaten down when they disappoint, and Priceline wants to avoid that classification right now. Priceline has been mostly range bound ($440 to $540) for most of the last 8 months, and a good report could help it break out of this range. I think a stock split would be great for the company and the stock as it would increase demand for the shares, helping it break out of that range, but I not optimistic we'll get it this quarter. I'll report back later in the week on how it did.

Source: Priceline Earnings Preview: What To Watch For