In our last article, we had advised to buy Priceline (PCLN) when a European recovery materialized. We reiterate that recommendation, as bookings.com makes up more than half of the room bookings revenue that Priceline earns. This article contains an update on our previous thesis, incorporating the latest news.
The company had missed analyst estimates for revenues for the first and second quarters of this year. International gross bookings rose 58% in Q1, but only 44% in Q2. Expectations for Q3 bookings are 10%-18% growth as compared to 27% in Q2. The Q3 EPS and revenue guidance was below analyst expectations, based on chances of further deterioration for operations in Europe. The stock was down 14% after market on this guidance news. In May as well, the stock was down 20% due to worries over European operations. 60% of room booking revenue comes from Europe.
Below is a list of the news since our last article that concern PCLN:
- The company may have understated its share of the European room nights in 27 European countries. Eurostat had earlier reported that total hotel nights were 1.6 billion in 2011, and Priceline had said that it had a mid-single digit share of the total. Eurostat counts hotel nights as 2 people staying in a room being equal to 2 room nights, while the company counts the number of nights of reservation irrespective of the number of people. This shows that the company's market share might be more (13%) than mid-single digits in Europe, and it thus has lower growth potential there than previously expected. Shares might face pressure because of this disclosure, as earlier this year the market share news had benefited the share price. This is also important because of the weaker Q3 guidance.
- To get customers to lessen their use of travel sites, some airlines are now also offering booking deals through their own websites. If customers book through travel sites, they are charged some fees as well as a deduction of some frequent flyer miles.
- PCLN is a beneficiary of the innovation box tax ruling in the Netherlands. Under that ruling, booking.com faces a tax rate of 5% till 2014, far less than its U.S. businesses and the normal Dutch tax of 25%.
- After Q2 results, Goldman Sachs reduced its target price for Priceline to $760, but still kept the buy rating citing that the risk-reward attached with PCLN was favorable. JP Morgan said that Priceline's shares are under short term pressure after the revelation that the upside potential in getting a market share in Europe was less. Many analysts believe that PCLN's booking.com still has significant room for growth in Europe, Asia Pacific and Latin America. Some hedge funds like Viking Global and Lone Pine added to their PCLN positions after Q2 results.
The put call open interest ratio is 0.98, meaning investors have mixed sentiments about PCLN's prospects. The ratio had dropped below 0.8 after the stock price decreased following Q2 earnings release, but has increased since then, as the stock price has appreciated.
PCLN's forward P/E is 17x as compared to EXPE's 16x and TRIP's 20x. The PEG ratio of PCLN is 0.94, while EXPE's is 1.48 and TRIP's is 1.56.
Over the long term, we believe that PCLN has the highest growth potential among travel companies, but at the moment, the share price continues to be impacted by worries surrounding the European economy. We retain our recommendation to buy PCLN once the European recovery is in sight.