On Friday, September 7, Brian Nowak, an analyst at Nomura upgraded shares of Priceline.com, Inc. (PCLN). The firm raised its rating on the stock from a Neutral rating to a Buy rating and set a $740.00/share price target. It was also noted that Brian Nowak is "cutting his European sales estimates for Priceline on account of its soft Q3 guidance, which was partly blamed on Europe, but also notes 65% of hotel room bookings are expected to be non-European going forward (up from 42% before), and predicts growing U.S. and Asia-Pac sales will yield 2012 and 2013 EPS slightly above Street estimates."
As a result of the upgrade, shares of PCLN reacted quite nicely, trading up 2.75% since the opening of trading on Friday. Since most stocks tend to trade in the direction relative to an analysts opinion, it should also be noted that stock reacted pretty flat, following an August downgrade from Stifel Nicolaus. That said, an analyst upgrade can mean great things for a stock, and in the wake of PCLN's upgrade, I wanted to highlight some of the positive catalysts behind my decision to establish a position in the company.
Priceline.com, Inc., which is based in Norwalk, Connecticut, together with its subsidiaries, operates as an online travel company. The company provides price-disclosed hotel reservation services on a worldwide basis with approximately 185,000 hotels and accommodations in 160 countries primarily under the Booking.com, priceline.com, and Agoda brand names; and price-disclosed rental car reservation services in approximately 4,000 locations worldwide through rentalcars.com name. It also offers retail airline tickets, hotel room reservation, and rental car services through its Name Your Own Price demand-collection system, as well as vacation packages consisting of airfare, hotel, and rental car components; cruise trips; and destination services, including parking, event tickets, ground transfers, and tours in the United States. In addition, the company provides an optional travel insurance package that provides coverage for trip cancellation, trip interruption, medical expenses, and emergency evacuation, as well as for loss of baggage, property, and travel documents for air, hotel, and vacation package customers; and collision damage waiver insurance for rental car customers in the United States.
Comparable Returns on Assets
Over the last four quarters PCLN has demonstrated very respectable returns on assets and if similar returns can continue, this catalyst could certainly contribute to the future growth of the company's stock. In the last 12 months PCLN has demonstrated a return on assets of 23.08%, which when compared to several on the company's competitors, clearly outpaces both, Expedia (EXPE) which demonstrated a return on assets of 4.19% and Orbitz World Wide (OWW), which demonstrated a return on assets of 2.60%.
Comparable Returns on Equity
Over the last four quarters PCLN has demonstrated very respectable returns on equities and if these returns can continue, this catalyst will certainly be a contributing factor toward the company's future growth. In the last 12 months PCLN has demonstrated a return on equity of 48.41%, which when compared to several on the company's competitors, clearly outpaces both, EXPE which demonstrated a return on equity of 13.44% and Orbitz World Wide OWW, which demonstrated a negative return on equity of -21.25%.
Profit Margin Comparisons
In my opinion, a company's margins can often be considered one of the more important key catalysts to consider before establishing a position. That said, I think the larger the profit margin the more attractive the company, and vice versa. In the last 12 months, PCLN has demonstrated a profit margin of 25.58% which outpaced both EXPE and OWW by a fairly wide margin. It should be noted that EXPE posted a profit margin of 10.42% and OWW posted a profit margin of -4.83% over the last 12 months.
PCLN, in my opinion, is one the better companies within the online travel sector and if the company can continue to outpace the competition we could easily see PCLN surpass the $785.00/share level. If the company can demonstrate an increase in both U.S. and Pac-Asia bookings over the next 12-24 months, as noted by Brian Nowak, I think PCLN will be the front runner in the sector for years to come.
Disclosure: I am long PCLN.