Priceline.com Incorporated (PCLN) has been a victim of a dismal quarter and a modest outlook as have many other high-growth momentum stocks. Similarly to Chipotle Mexican Grill (CMG), Starbucks (SBUX), and Monster Beverage (MNST), Priceline experienced a sharp selloff after it released its quarterly report. Since its decline, the stock has been hovering around $560 a share and is providing an opportunity for investors as it meets resistance near these levels. As the largest online travel company through its primary brand and subsidiaries, Priceline will continue to prosper as e-commerce maintains its rapid growth. After a more pessimistic outlook and a decent quarter, the overcompensation on the sell-side in Priceline stock has constructed an intriguing play that has the ability to excel in imminent quarters and for years to come.
The second quarter for Priceline was not in itself terrible, but with such a heavy reliance on momentum its combination with a dim outlook shot the stock out of the sky. It slightly missed on revenue, putting up $1.3 billion under expectations of $1.35 billion. On the flip side, it beat on earnings per share of $7.85 as opposed to estimates of $7.36. In comparison to the same quarter last year, revenue was up 20.4% and EPS was up an astounding 43%. International revenues amounted to $859 million, which is a 40.2% increase year over year. The growth put forth in these numbers would surely excite investors if they were produced by many other names, but this is the kind of growth that has become a requirement for Priceline to achieve and consequentially the company failed to blow anybody away.
More blame for the post-earnings hit that Priceline took can be attributed to slashed estimates than can be to its quarter. The company now expects earnings to range between $11.10 and $12.10 per share in the next quarter. The large boost from the second quarter is a result of seasonal differences and of course its pure growth, but even this number falls far short of expectations. Analysts had anticipated an EPS of $12.82 for the third quarter, but after the corporation noted deteriorating conditions in Europe it is apparent that this number is unlikely to be hit. On a positive note, it may be possible that like its share price, the company overcompensated in its guidance for the third quarter. Surprisingly enough, consumer confidence rose in July which makes it plausible to think that Priceline may endure a better than foreseen summer to help counteract the woes from Europe.
Unlike the valuations of many other internet stocks such as Facebook (FB) or LinkedIn (LNKD), Priceline's is very realistic going forward and is aided by a robust and secure balance sheet. Its current price to earnings ratio of 25.47 is relatively high, but is incomparable to the 72.35 multiple awarded to Facebook and appears minuscule next to the 834.15 P/E attached to LinkedIn. Furthermore, Priceline's forward P/E of 15.60 is quite modest and probably undercuts its growth prospects giving the stock even more value, especially when its price to earnings to growth ratio of 0.86 is thrown into the conversation. Priceline's balance sheet is equally as attractive. The company holds $2.66 billion in cash and short-term investments and maintains $3.97 billion in total assets. On the other hand it has only $1.4 billion in total liabilities and a harmless $545 million in debt, a mere $77 million of which is long-term. Priceline's balance sheet is near flawless and its valuation is fair enough to the point of potentially giving the stock additional value.
In terms of Priceline's returns and performance when juxtaposed with the that of its competition, the results are excellent. The company's margins are as superior as the margin of differential between its own and those of its competition. Priceline operates a gross margin of 74.24% and a net margin of 25.65%. Priceline's peers, as accumulated by Scottrade, average a gross margin of 47.61% and a net profit margin of 13.89%. Priceline's primary competitor, Expedia (EXPE), has a net profit margin of 9.83%, less than half of the same metric that Priceline has constructed. In a continuation of the Expedia - Priceline comparison other statistics show just how large the disparity between the two really is. Priceline manages an enormously high 49.90% return on equity, which makes Expedia's return of 13.95% look like a joke. Also, Priceline's 5 year sales growth is recorded to be 31.14% while Expedia's is a much more modest 9.04%. Priceline's margins, returns, and other metrics are superb and blow its peers, including its most direct threats, out of the water entirely.
Last but not least, Priceline's business operations and story are the main reason to jump behind the stock. To do a quick overview, Priceline allows customers to make hotel room reservations at over 210,000 locations across the globe. In the United States, the website provides users with the ability to book car rentals, airline tickets, vacation packages, destination services, and cruises through priceline.com. Also, it now offers rental car reservations worldwide through rentalcars.com. Its vast offerings and worldwide watermark have helped to boost its market share. Despite Europe and other international operations, which have astonishingly been a strong point for Priceline, the macro outlook for online travel looks radiantly bright. Forrester Research projects that U.S. e-commerce sales will rise to $327 billion in 2016 from $202 billion in 2011, which is a compound annual growth rate of 10%. International markets will follow suit as e-commerce as a whole, including online travel booking, takes market share from similar off-line services.
In a growing market and with an internationally recognizable brand, Priceline is positioned perfectly to not only meet, but exceed projections. In the short-term, European issues and domestic consumer confidence have been a pain for the company. However, increasing optimism surrounding the economy has actually strengthened consumer confidence (at least in July) which, as aforementioned, would help offset at least some downside from Europe. It may seem inconsequential, but it was recently announced that William Shatner is back as the Priceline negotiator. This announcement sent the stock up almost 2% and the pop is not without proper cause. Shatner was the essential element in the company's marketing campaign and helped to make Priceline a household name in conjunction with being the first thought when online travel comes to mind, and the return of his presence will help carry on that legacy. Although Priceline did cut estimates for the coming quarter, if consumer confidence continues to beat to the upside and the European situation does not quickly deteriorate (all we can do is hope) the company could surprise for the next few quarters with a strong summer and holiday season.
Priceline's second quarter release did not spark optimism at first glance, but the steep drop in stock price in combination with solid growth and an excellent story has done well to salvage it. Stifel Nicolaus analyst George Askew cut his rating on Priceline recently to hold from buy citing that the company is now a growth stock rather than a momentum stock. He may be correct in that statement, but his reduced rating is on the contrary. Priceline may have lost its momentum for the next few months, but now that the stock is not priced for perfection Priceline looks as attractive as ever. Moreover, the future prospects for Priceline will ultimately provide for healthier, long-term momentum that will have much more stability and endurance. In its superiority to its competition, placement at the top of an ever-growing sector, strong balance sheet, and attractive valuation, Priceline is thoroughly solid. Look for its stock to resist around $560 a share as it has, and even if not, any price in proximity to its current location is an acceptable level to enter or add to a long position on Priceline.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in PCLN over the next 72 hours.