By David Sterman
Do analysts' price targets matter? You bet. Any time you see a big gap between rational assessments of fair value and the current share price, it pays to dig deeper.
Roughly 18 months ago, this is precisely why I saw value in shares of travel site Priceline.com (PCLN). Back then, I noted on InvestingAnswers.com that shares of Priceline.com looked oversold at $180, since analysts were suggesting much higher price targets. And you could count on those analysts to talk up the stock in repeated meetings with clients.
At the time, I thought shares look poised to rebound to the $230 to $260 range, where analysts suggested the stock would ultimately reside. I was a bit shy of the mark -- shares eventually made a move to $550.
The huge run implies investors have missed the boat. But now, after dropping $100 in the past month back to about $450, those same Wall Street analysts once again see a lot more upside, anticipating 30%, 40% or even 50% gains in the next year. Let's see why they're so bullish on the stock.
Michael Millman of Millman Research has a $585 price target on Priceline. He is actually one of the least bullish analysts following the company. He is concerned about "being overconfident about Priceline's ability to continually and substantially beat guidance -- despite management's warnings."
He's got a point; Priceline has topped earnings per share (EPS) forecasts by roughly $0.60 in each of the past two quarters, and this kind of outperformance comes to be expected by momentum investors. So if Priceline.com simply met analysts' forecasts in the current quarter, then shares may see further profit-taking. Still, his price target is nearly 30% above current levels.
Analysts at Goldman Sachs are a bit more bullish, anticipating a move up to $610. They like the fact that Priceline has the industry's most robust growth prospects -- especially in the international sphere, though its shares merely trade in-line with the peer group.
Analysts acknowledge that economic troubles in Europe could dampen results in the near-term, but "believe that, to a degree, these concerns are already reflected in the stock." They say shares, trading at about 9 times projected 2013 EBITDA (on an enterprise-value basis) will trade up to 11.5 times EBITDA once these European concerns abate. This implies about 32% upside from current levels.
Merrill Lynch analysts, with a $660 price target, calls Priceline.com their "Online Travel pick." They're particularly enthused about Priceline's booking.com site, which is likely to see increased market share in the United States and Asia in coming quarters. They add that Priceline has the "most operating leverage in the sector." They are correct. Take a look at Priceline's EBITDA margins during the past eight years:
The chart above helps explain why Priceline's bottom line keeps expanding much faster than its top line. Analysts expect sales to jump 40% in 2011 to $4.33 billion, but expect EPS to grow an even more robust 72%. Sales in 2012 are expected to rise about 25% to $5.4 billion, while EPS could jump a healthier 30% to about $30, according to consensus forecasts.
Shares trade for about 15 times that consensus 2012 profit forecast, though Merrill Lynch analysts argue for a multiple of 22, which is reasonable in light of the 30% projected profit growth rate for 2012.
Yet its Citigroup's Mark Mahaney, and his $700 price target, that really got my attention. Looking at recent third-quarter results, he noted a hefty 78% jump in EBITDA from a year earlier. "Very few companies can do this... and we don't know any that are carrying a 16X P/E [price to earnings ratio]," he notes. (Shares have fallen since that Nov. 7 note to clients, now trading at 15 times his forecast).
Mahaney sees four reasons to be so bullish:
- The shift to online travel from traditional travel agencies shows no signs of slowing down.
- The company still has modest market share in Europe, Asia and Latin America.
- Priceline carries the best inventory of hotel rooms in the industry.
- And the company continues to operate at a very high level of efficiency.
This last point explains why many mutual funds consider Priceline.com to be a "must-own" holding. As Mahaney notes, "this management team has worked through several near-corporate-death experiences (9/11, dot-com burst, etc.). We also have a bias for what we view to be 'Shut Up & Deliver' Management teams like PCLN."
To reach Mahaney's lofty $700 price target -- which would represent 50% upside -- the global economy would need to look a bit healthier in 2012. Investors need to trust that Priceline will be able to keep delivering the robust growth that's currently embedded in forecasts.
Risks to Consider: Priceline.com occasionally delivers a subpar quarter. That's what happened a few years ago, when a volcano eruption in Iceland temporarily dampened air travel to Europe. The current crisis in Europe could lead to a temporary slowdown in business travel as well.
This is a clear case of a good company that is now in the "on-sale" bin after falling $100. Shares could even fall lower from here, but if you've' got a one- or two-year time horizon, then this proven winner is likely bound to rebound to fresh new highs.
Disclosure: Neither D. Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.