Shares of priceline.com Incorporated (PCLN) have posted a stellar performance by returning investors 31.58% over the past 12 months. The return is substantial even with a 25% plunge in May on concerns about the company's European exposure. I believe the pullback has created an invaluable opportunity to buy into a major player in an industry that enjoys a secular tailwind of growing online travel bookings.
My bullish view on PCLN is based on the following four reasons:
1) The stock is still cheap even after a nice one-year run up. Consensus estimates predict revenues, EBITDA, and EPS to continue growing at a significant 2-year CAGR of 24.3%, 32.8%, and 31.0%, respectively (see below). At $690.55 per share, PCLN trades at 0.9x PEG, suggesting the stock is fairly priced relative to its growth prospects.
Compared with other two major on-line players in the traveling industry, PCLN has the highest growth potential and is also the most profitable company. Its liquidity position is extremely healthy as reflected by the robust FCF margin and high level of the current and quick ratios. As such, the financial excellence should merit a solid valuation premium to its peers.
However, at the current valuation of 15.4x, the NTM EBITDA, and 21.2x the NTM EPS, PCLN only trades at a 4.6% premium on both the peer average P/E and EV/EBITDA multiples (see below), suggesting an additional upside price action is very likely as the European concern is overblown.
2) The estimated revenues, EBITDA, and EPS have substantial upward revisions over the past 12-18 months, indicating the market remains confident in the firm's growth prospects (see below).
3) The robust FCF generating ability allows PCLN to gradually increase the size of the share buyback (see below). With the company's continued growth momentum and its superior FCF conversion rate, it is reasonable to expect the firm to repurchase more shares in the future, which will likely provide a solid price support.
4) Analysts are very bullish on the stock as well. Of the 21 ratings, there are 4 strong buys, 14 buys, and only 3 holds.
In the light of the cheap valuations, solid growth potential, and strong cash flow position, I recommend acquiring the shares at the current price or selling an out-of-money put option to establish a position.
Comparable analysis table is created by author, consensus estimate tables and FCF chart are sourced from Capital IQ, and financial data is sourced from Yahoo Finance, Morningstar and Capital IQ.
Disclosure: I am long PCLN.