Good Third Quarter, But Concerns Remain About Long-Term Margins

| About: The Priceline (PCLN)

Shares of Incorporated (PCLN) ended the week on a strong note. Shares rose more than 8% on Friday after the online travel company reported its third quarter results on Thursday after the close.

First Quarter Results reported third quarter revenues of $1.70 billion, up 17.4% on the year. Gross bookings rose 25.2% to $7.83 billion, and were up 34% on a local currency basis. Priceline comfortably beat the analysts consensus of revenues of $1.65 billion.

Priceline reported operating profits of $756 million, up 22.6% on the year. Net income applicable to shareholders came in at $597 million, or $11.66 per diluted share. Non-GAAP earnings per share came in at $12.40 per share, which beat analysts consensus by $0.59 per share.

At the presentation of its second quarter results, Priceline revised its third quarter downwards on weakness in Europe. Third quarter results beat the company's own guidance released at the time.

At the end of the quarter, Priceline has over 245,000 hotels and other accommodations on its websites, up 44% on the year. CEO Jeffery H. Boyd commented on the results:

"The Priceline Group delivered solid growth and operating results in the 3rd quarter as growth in the second half of the quarter in our key European market exceeded our forecast. Globally our hotel business grew room nights by 36% over the same period last year, compared to 39% growth in the second quarter. Our rental car business grew rental car days by 35% over last year, an acceleration from 29% in the second quarter, led by improving results at and continued strong growth from"

Detailed Information

Growth in gross bookings was driven by the international activities. International bookings rose 29.7% to $6.47 billion. In constant currencies, bookings were up 40.6%. Domestic gross bookings rose 7.2% to $1.36 billion.

Agency bookings rose 25.4% to $6.42 billion, while merchant bookings were up 24.0% to $1.41 billion. sold 55.2 million hotel room nights during the quarter, up 35.9% on the year. Some 9.4 million rental car days were booked, up 34.9% on the year. Growth in airline tickets rebounded to 6.1% or 1.7 million tickets, after the operations showed a year-on-year decline in bookings in the second quarter.


For the near term future CEO Boyd remains cautious:

"While we remain concerned about economic weakness across Europe, Asia and the U.S., the Group intends to focus on solidifying its position as the world's largest and most profitable online hotel reservation service by continuing to add hotels and other accommodations and better servicing our customers through constant innovation in our mobile and desktop sites."

Priceline is targeting a 21%-28% increase in total gross bookings, driven by strong international gross bookings which are expected to increase between 27 and 35%. Domestic gross travel bookings are expected to be flat.

Revenues are expected to increase between 15% and 22% on the year, boosting gross profits by 26% to 33%. Non-GAAP earnings per share are expected to come in between $6.12 and $6.57. The guidance for fourth quarter earnings is in line with analysts consensus of $6.34 per share.


Priceline ended its third quarter with $4.7 billion in cash, equivalents and short term investments. The company operates with roughly $1.4 billion in convertible debt, for a net cash position of $3.3 billion.

For the first nine months of 2012, generated $4.1 billion in revenues. The company reported a net income of $1.1 billion, or $22.05 per diluted share.

The market currently values at $31.6 billion, which values the operating assets at $28.3 billion. Full year revenues are expected to come in around $5.3 billion, valuing the operating assets at 5.3 times annual revenues. Shares are valued at roughly 20 times annual earnings.

Priceline currently does not pay a dividend.

Investment Thesis

Year to date, shares of Priceline have risen some 35%. Shares rose from $480 in January to highs of $775 in April. Shares fell back to $560 in August on worries about slower online travel market growth in Europe. Shares are currently exchanging hands at $635 on the back of the decent results.

Shares have seen dazzling returns over the past years. Shares rose from lows of $50 in 2008 to $635 at the moment. Between 2008 and 2012, Priceline grew annual revenues from $1.9 billion to an expected $5.3 billion this year. Net income rose from $182 million to a guided $1.4 billion this year.

Despite the tremendous growth in the online travel industry, and the increased competition, margins have increased significantly. Net profit margins rose from 9.7% in 2008 to 24.3% in 2011. Margins are expected to surpass the 25% mark this year. It is not just which had a good year. Other large competitors including Expedia (EXPE) and Tripadvisor (TRIP) have reported decent third quarter results, and have seen shares rise sharply this year.

In its earnings transcript, made some interesting comments. The company continues to focus on mobile applications and continues to gain market share in the online travel market. The company notes that return on investments are falling as more advertising is based on paid channels. Priceline sees cancel rates increasing in general, but net growth in gross bookings continues to surpass cancel rates.

Given the strength in the third quarter, I am cautiously optimistic about Priceline's prospects. The company continues to grow at a rapid pace, gain market share and remains incredibly profitable. The strong balance sheet gives the company enough financial power to fence off competitive threats.

While I think shares are fairly valued based on these points I remain concerned about long-term margins. Priceline's revenues make up 21% of total gross bookings, a sizable percentage for an intermediair. I fear that at some point price-consciousness among consumers and increased competition will drastically lower that percentage.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.