Priceline: A Buy On The Dip Opportunity

  • Priceline’s stock has been on the decline for over a month, having lost over 10% since its close on August 11 2014.
  • Priceline is the most attractive stock in the OTA space based on growth potential, profit margins and current valuations, as reflected in our Priceline stock analysis.
  • The latest drop in price can be used as an opportunity to add long positions in the stock to benefit over the next 6 months.

Priceline FY 2014 target price

Priceline’s (NASDAQ:PCLN) stock has been on the decline for over a month, having lost over 10% since its close on August 11 2014. The stock has been among our top stock picks and has generated a solid 48% return since its addition to our top stock picks. The latest fall in price could raise an obvious question in the minds of investors.  Has the recent pullback opened up a buy on the dip opportunity an investor? We look at Priceline in comparison to sector peers Expedia (NASDAQ:EXPE) and Orbitz Worldwide (NYSE:OWW) in order to find an answer.

Priceline: An outperformer in the OTA space

Priceline has by far been the best performer in the online travel agency sector, outperforming nearest competitors Expedia and Orbitz consistently over the last few years. We now take a look at a few indicators of topline growth, profitability and valuation in relation to the sector peers.

Topline growth: Priceline’s continues to outperform

Let’s now take a look at some key indicators of topline growth.

Priceline_Expedia_Orbitz Wrldwide gross bookings

Priceline and Expedia have seen some meaningful growth in the last five years in terms of gross bookings. Gross bookings at Expedia have grown at a CAGR of 16% from 2009-2013. While this towers over Orbitz Worldwide’s gross bookings CAGR of 3%, Priceline has raced ahead of the competition with a CAGR of 43% in the same time period. So how much of this actually converts to revenue’s for these companies?

Revenue to Gross bookings ratio

Revenue to Gross bookings ratio is an indicator of the percentage of gross bookings which translate into actual revenue for these OTA’s.

Priceline_Expedia_Orbitz revenue percentage of gross bookings

At a first glance, Priceline might seem in trouble with its dropping trends in revenue to gross bookings percentage. However, it is interesting to note that even with the declining trend, Priceline is still converting a large part of its gross bookings to revenue with a conversion rate of 17% against Expedia’s 12% and Orbitz Worldwide’s 7%.

It can be seen that Priceline has outperformed its rivals in gross bookings growth as well as revenue generated from gross bookings. This has led to a solid growth in revenues with Priceline registering a CAGR of 30% against Expedia’s 12% and Orbitz Worldwide’s 3.5% from 2009-2013.

Priceline Profitability: well ahead of competition

We now take a look at the profit margins of the three companies over the last 5 years.

Priceline_Expedia_Orbitz operating profit margins

Priceline has seen an operating margin expansion of over 15 percentage points from 20% in 2009 to 35.5% in 2013. Expedia on the other hand has seen its operating margin shrink from 19% in 2009 to 7% in 2013. Orbitz Worldwide has seen the most inconsistent bottom line performance with operating margin ranging from -37% in 2009 to 7% in 2013. It is clear that Priceline has been more efficient in implementing and executing cost controls leading to higher profit margins over time.

Earnings per share growth

Priceline_Expedia_Orbitz EPS growth

Priceline has seen a consistent rise in earnings per share over the last 5 years, increasing from $10 in 2009 to $36 in 2013 at a CAGR of 38%.  Expedia, in comparison, has seen its earnings decline from $2.06 in 2009 to $1.67 at an average rate of 5%. Orbitz has turned in earnings per share of $1.46 in 2013 compared to a loss per share of $4 in 2009. Priceline earnings growth is well ahead of the competition, mainly on account of its higher take rate from gross bookings and also higher profit margins.

Priceline, Expedia, Orbitz Valuation analysis

Let’s now take a look at Priceline PE ratio and PEG ratio in comparison to that of Expedia and Orbitz. The table below summarizes the valuation multiples of the three companies.

Relative valuation

Priceline

Expedia

Orbitz Worldwide

Current Price ($)

1165.79

83.51

8

LTM PE ratio

29.15

33.67

47.06

PEG ratio

1.16

1.62

1.25

Priceline is clearly the most attractive of the three companies with the lowest PE ratio as well as PEG ratio. Purely based on the fundamental performance, Priceline should command a premium valuation as compared to Expedia and Orbitz. However, that is not the case with the current valuations as Expedia as well as Orbitz worldwide are trading at valuation multiples higher than Priceline. This is a clear case of asymmetry in the risk-return profiles of the three companies. We think the recent pullback in Priceline stock has opened up an attractive entry point for investors.

Priceline short term target

Priceline’s current valuation levels are the lowest over the last twelve months. The chart below displays Priceline’s LTM PE ratio for the last one year.

PCLN-stock-chart

Priceline had traded at a peak valuation multiple of 38 in March 2013 and an average multiple of 32.5 over the last one year. We estimate FY 2014 GAAP earnings per share of $44.83. We calculate our target price based on an earnings multiplier of 30, a conservative estimate given the historical valuation levels and strong growth potential of Priceline. We estimate a target price of $1345, which represents a potential upside of 15.4% over 6 months. The latest drop in PCLN stock has presented investors with a good opportunity to add long positions to gain significant benefits over the coming months.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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