Stifel Nicolaus Internet analyst Scott Devitt on Priceline’s (ticker: PCLN) Q4 2005 earnings results:
• We reiterate our Buy recommendation on shares of Priceline. We are adjusting our 12-month target price from $31 to $29 to account for the difficult travel environment. At $29 per share, Priceline shares would trade for 16x 2007 EV/unlevered free cash flow (adjusted for NOL and tax-effecting FCF) and 11x EBITDA. At current levels, Priceline trades for 12.6x EV/FCF and 8.6x EBITDA.
• Priceline reported 4Q05 diluted cash EPS of $0.28, $0.02 above our $0.26 estimate. The reported revenue of $203.9 million was in line with our $204.4 million expectation.
• Priceline's had $537 million in gross bookings, showing 29% of growth, or 21% organic growth. Priceline's domestic organic growth rate was 5% in the fourth quarter broadly consistent with the trend in the second and third quarter.
• Priceline Europe bookings increased by 88% organically to $158 million in the quarter. We estimate that Priceline's hotel bookings from Europe could amount to as much as 35% of gross bookings in 2006.
• We are lowering our 2006 revenue estimate from $1.03 billion to $1.02 billion and decreasing our EPS estimate from $1.57 to $1.56. Our 2007 EPS estimate remains unchanged at $1.80.
If one were to rewind Priceline's business two years and insert the following from the 4Q05 results - negative growth in opaque hotel rooms, negative growth airline tickets sold, and 5% organic growth in U.S. operations - one could easily conclude that Priceline would have fundamental challenges. Quite the contrary, we believe Priceline's management team to have proven to be a material asset to shareholders over the past couple of years. One of the most important components of a management team's role in a business is to appropriately allocate capital. In the case of Priceline, management has taken a fairly mediocre core business (opaque air, hotel, and car) and layered in retail offerings across the entire business as well as an international operation that now accounts for almost 30% of the company's gross bookings. On an organic basis, Priceline's hotel operations in Europe grew by 88% in the fourth quarter, which is well more than 2x the rate of growth in online travel in Europe. In fact, the affiliate-driven hotel consolidator businesses that Priceline bought in Europe, Active Hotels and Bookings BV, happen to be the best positioned for long-term growth, in our view. Competitors have recently discussed an increasingly competitive environment in Europe driven by suppliers and large tour operators. The nature of Priceline's business in Europe consists of consumers booking hotel rooms outside of packages and, in many cases, purchased in combination with a supplier direct air ticket from a discount airline. In other words, Priceline European business operates in the most fragmented, least competitive component of the market.