Priceline: A Value Stock For 2015

  • Priceline has outperformed sector peers on revenue growth as well as profitability.
  • The improving fundamentals haven’t been reflected in the stock price, which has underperformed the market indices.
  • We feel the market has over reacted to growth concerns around European economy and we reiterate our long term bullish outlook on Priceline.

Priceline A value stock for 2015
Priceline’s (PCLN) stock has trended sideways throughout 2014, opening the year at a price of $1162 per share and currently trading at $1156 per share, marginally lower in the year to date (YTD). This compares against a 13% gain in the S&P 500 and a 14% rise in the Nasdaq Composite. The PCLN stock has been among our top stock picks for 18 months and has generated a solid 45% return since then, outperforming the 26% gain in the S&P 500 (SPAL) and 39% gain in NASDAQ composite (COMPX). However, we believe Priceline stock price is headed higher over the long term, given its strong fundamental performance and attractive valuation multiples.
PCLN stock chart
PCLN stock price data by amigobulls.com

Priceline: A value stock in the OTA space

In our earlier post on Priceline’s stock price dip, we had seen that the company was by far the best performing Online Travel Agency with the fastest growth in gross bookings as well as the highest revenue to gross bookings ratio, leading to higher topline growth over the last few years. The company also outperformed its peers in profit margin expansion as well as earnings growth over the last 5 years ending 2013.

Priceline's Financial Performance

Priceline has continued its strong performance through the first three quarters of 2014 with solid growth in gross bookings and higher revenue take rate and profit margins.

Priceline, Expedia, Orbitz worldwide quarterly gross bookings

Priceline expedia Orbitz gross bookings

Gross bookings is the total dollar value of bookings which are facilitated by an online travel agent. Priceline has registered a 32% YoY growth in gross bookings in the first 3 quarters of 2013, with total gross bookings reaching $39.6 billion in the period. Expedia (EXPE), with total gross bookings of $36.1 billion in the first three, also registered a YoY growth of 32% while Orbitz worldwide (OWW) experienced a 16% YoY growth over the same period.

Priceline continued to convert a higher portion of its gross bookings into revenues with an average take rate of 16.5% of gross bookings through 2014. This compares favorably against Expedia’s 11.2% and Orbitz Worldwide’s 7.2% through the first three quarters of 2014.

Priceline, Expedia, Orbitz Worldwide revenue take rate

Priceline expedia Orbitz gross take rate

Take rate is the percentage of gross bookings which contributes to the revenue of an online travel agent. It is majorly the commission or cut charged by an OTA for facilitating a transaction. The higher take rate of Priceline has resulted in the firm registering a significantly higher topline growth than its peers. Priceline revenue growth for the 3 quarters of 2014 came in at 20.2% compared to 17% for Expedia and 10% for Orbitz worldwide.

Priceline also once again outperformed its competitors on the measures of profitability. The company reported an average operating profit margin of 38% through the first 3 quarters of 2014 and a net profit margin of 30%, which was significantly higher than the respective profit margins of Expedia as well as Orbitz Worldwide.

Priceline, Expedia and Orbitz worldwide profit margins

Priceline expedia Orbitz profit margins

Priceline Valuation

Priceline’s valuations continue to look attractive in relation to peers, following the recent correction in the stock price.

Priceline

Expedia

Orbitz Worldwide

Current Price (December 26)

1156.22

89.31

8.37

PE ratio

26.10

27.91

59.79

PEG ratio*

1.15

1.32

5.41

one year forward PE*

18.76

19.08

20.92

*From Yahoo Finance

As seen from the above table, Priceline has the lowest PEG ratio, which indicates its attractive valuation compared to Expedia and Orbitz Worldwide.

Priceline valuations at historic lows

Priceline’s stock is not only trading at attractive levels in comparison to peers; the stock is also attractive as compared to its own historical valuations.

PCLN stock chart
Priceline stock chart by amigobulls.com

The stock’s last twelve months (LTM) valuation multiples range over the last two years is summarized below.

PE (LTM)

PS (LTM)

High

38.06

10.42

Low

22.99

6

Average

30.42

8.22

The stock is currently trading significantly below its average PE ratio as well as PS ratio over the last 2 years. The LTM PE ratio of 26.1 is 14.2% lower than the two year average while the LTM price to sales ratio (PS multiple)  of 7.4 is 9.75% lower than the two year average.

Concerns

The stock has underperformed following concerns of slowdown in Europe, which is a major market for Priceline subsidiary bookings.com. The concerns recently culminated in the stock being downgraded by Goldman Sachs.

Conclusion

In conclusion, Priceline has once again outperformed its sector peers in topline growth as well as profit margins. However the performance has not been reflected in the stock price, which has seen Priceline’s stock underperform its competitors as well as market indices on the bourses. The fall in stock price and continued outperformance on fundamental metrics makes Priceline a value buy for 2015 in the OTA space. We continue to reiterate our long term positive outlook on the stock. However, the stock price could be volatile in short term trading, impacted by macro concerns in its key European market.

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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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