Last week, shares of online travel company Priceline (PCLN) plunged after missing on quarterly revenues and issuing guidance that was well below expectations. The company blamed macroeconomic conditions, especially deteriorating conditions in Europe. Shares, which were already well off their 52-week highs, were hit hard, and have erased several months worth of gains. But even with the weak guidance, there were plenty of positives from the prior quarter and this stock looks like a tremendous buy at these levels.
Second Quarter Results:
Priceline reported total revenues of $1.326 billion, missing estimates for $1.35 billion. Non-GAAP earnings per share came in at $7.85, which was well ahead of analyst estimates that called for $7.37. Despite the revenue miss, Priceline was able to effectively control its costs, which is why it beat so much on the bottom line.
The following table shows Q2 margins over the past couple of years.
Overall, Priceline's total revenues were up 20.3% over the prior year period, and this was considered "bad". However, the cost of revenues was down more than 8.7% over the prior year period. That led to a 34% increase in gross profit, definitely evident in the huge rise in gross margins from last year's Q2.
Overall, operating expenses rose about 28.6%. That is faster than the rise in revenues, but not as fast as the rise in gross profit. Thus, operating income rose by more than 41.1%, and thus, operating margins were up more than five full percentage points.
Priceline did see higher interest costs in the period, and the tax rate rose from 19.05% to 20.87%, but it also saw a currency gain in the period, compared to last year's currency loss. Net income was up more than 37%, and net profit margins were up more than three full percentage points.
For a company operating in such a tough macroeconomic environment, Priceline is doing quite well. Their balance sheet has mostly improved as well, as seen in the following table.
|Cash & Investments||$589,568||$1,220,199||$1,949,418||$3,942,342|
While Priceline's liabilities grew a little faster in the past year than the asset base did, Priceline now has twice as much cash and investments as it did a year ago. Working capital and the current ratio have also increased nicely. Priceline is not in any financial trouble currently.
Priceline has always been known for its conservative guidance. It is one of those companies that loves to give very low guidance, so that when it reports earnings it can beat them. Last quarter, Priceline guided to earnings per share of $7.20 to $7.40. They finished up with $7.87. So when Priceline gives guidance, I'm not surprised if they give guidance that is lower than what everyone is expecting.
This quarter, guidance was a bit disappointing, but most of that should have been factored in. It is no surprise that Europe is very weak, and with Priceline being conservative, you would expect guidance a bit below what analysts were looking for.
That's exactly what happened. Priceline stated that 3rd quarter revenue growth would be in a range of 9% to 15%, and analysts were looking for 24% growth. Earnings per share guidance was a range of $11.10 to $12.10, and estimates called for $12.82. Priceline gave the following statement along with its guidance:
"The company noted that its guidance reflects current operating trends and an assumption that economic conditions in Europe will further deteriorate. The company believes that concerns related to sovereign debt and the viability of the Euro have negatively impacted historical operating results and are likely to impact future results. Given the uncertainty surrounding worldwide economic conditions, particularly in Europe where much of the company's business is concentrated, the company believes the variability around its guidance is greater than is usually the case."
Personally, I'm not totally concerned with the guidance. I think that they were very conservative, and I'm looking for them to come in at the upper end of the range, or perhaps ahead of it. Also, this was a stock that was about $100 off its 52-week high going into this report. That being said, some of the weakness was already priced in. This is still a company that is looking for both double digit revenue and earnings growth in the quarter. That's pretty good for a company whose business is mostly dependent on Europe.
Growth / Valuation / Analysts Take:
Priceline has been a high growth company for many years, and with that, has carried a lofty valuation as well. The price to earnings ratio has been in the upper 20s for extended periods, and has even been in the 30s and 40s at times. That has given some investors pause, and when you get a guidance miss like this, the stock can plunge like it did.
But at this point, I think that Priceline looks undervalued, at least compared to its competitors, Expedia (EXPE) and TripAdvisor (TRIP). The following table shows each company's projected revenue and earnings growth for 2012 and 2013, as per current analyst estimates, and shows the P/E for each name each year based on the current price and currently expected earnings.
|2012 Revenue Growth||18.3%||13.6%||18.9%|
|2013 Revenue Growth||17.4%||10.7%||18.9%|
|2012 Earnings Growth||28.9%||7.6%||3.5%|
|2013 Earnings Growth||19.4%||17.2%||20.1%|
In terms of revenue growth, Priceline is well above Expedia, and close to TripAdvisor, and this includes estimates coming down after the latest quarter. In terms of earnings growth, Priceline is ahead of both names, and by a significant amount.
But at the same time, Priceline carries a lower valuation than both, especially when it comes to 2013. This, for a company that is expected to post higher growth than both of its peers.
Now, I'm not arguing that Priceline deserves a 25-30 or higher P/E here. But I think that 22 times expected earnings for this year would be an appropriate valuation. If you multiply that times expected earnings, you get a target of $665 for this year, about $100 above where we are currently. If you give the name a 20 valuation for next year, because reduced revenue and earnings growth should give a lower valuation, you would get a price target of $722. That is still plenty of growth, and means right now is a good time to buy.
But don't just take my word for it. Let's see what analysts have to say. The following table shows the average analyst rating (1=strong buy, 5=sell), along with the average price target, and corresponding upside from Friday's close.
Analysts see Priceline as a buy, and the other two as a slight buy, but almost a hold. Priceline has a significant amount of upside, according to analysts. TripAdvisor has some upside, and analysts think Expedia could go down from here.
Conclusion - Buy on weakness:
Priceline reported an okay quarter. While they missed on revenues, they beat significantly on earnings. Margins are improving nicely, and the balance sheet is very strong. While guidance wasn't as high as hoped, the company still guided to double digit revenue and earnings growth. Considering they receive a lot of their business from Europe, that's still decent growth.
The stock took a dive after earnings, but was well off its 52-week high to begin with. In my view, that creates a buying opportunity. Priceline is still expected to show strong revenue and earnings growth this year and next, and growth is expected to match or be above that of its competitors. Priceline also trades at a discount to both, despite higher growth. Analysts like the name, and see great upside. Priceline should be bought on any weakness here.