Priceline.com Inc. (NASDAQ:PCLN), one of our top stock picks at Amigobulls and a leading online travel agent, is set to announce its Q4 2013 performance results on Feb 20 after market close. The earnings release (ER) of Priceline.com will bring the curtain down on what has been a successful quarter for majority of the OTA’s. Expedia (NASDAQ:EXPE) Orbitz worldwide (NYSE:OWW) and Tripadvisor (NASDAQ:TRIP) beat revenue and earnings estimates setting up a good quarter for the industry as a whole. We take a look at Priceline’s historical numbers and our expectations from their Q4 ER.
Priceline.com: Historical performance
Tracking Priceline’s gross profit growth is an accurate measure of the firm’s topline growth due to the company’s revenue reporting policies. While revenues from the ‘Name Your Own Price’ service are reported on a Gross basis (total transaction value), revenue from other services is reported on a net basis (only fees/commissions). Hence using gross profit (Net revenues to Priceline) would be a more accurate measure to track the firm’s growth, considering that express deals and other products are outpacing revenue growth from the ‘Name Your Own Price’ service. The chart below displays the topline growth by segment over the last 4 quarters.
Agency revenue, mainly consisting of revenues from booking.com, is the major revenue driver at Priceline. Another segment reported as other revenues, consists of significant advertising revenues from kayak.com. However kayak.com was acquired in Q2 2013 and is yet to complete a year with the Priceline group making the year on year growth a non-usable metric to evaluate the specific segment. Let’s now take a look at overall revenue growth in comparison to the gross profit growth, which is a better indicator of Priceline group’s growth.
The leading growth in gross profit reflects a gross margin expansion in ‘Name Your Own Price’ service, leveraging gross profit growth (net revenue to Priceline) ahead of the overall revenue growth. Higher gross margins at ‘Name your own price’ will help drive net revenues from the service even as the service continues to slow down at the gross revenue level.
While most OTA’s are having a hard time finding the right balance between current profitability and investments to drive future growth, Priceline.com has been wielding a sort of magic wand with industry leading profit margins accompanying the company’s current revenue growth rate (also industry leading). Let’s take a look at the change in Priceline’s profitability levels over the last few quarters.
|2012 Q4||2013 Q1||2013 Q2||2013 Q3|
|Operating margin (as % of gross profit)||-2.1%||-1.8%||-5.6%||-1.5%|
|Net margin (as % of gross profit)||-0.4%||-0.3%||-3.5%||-0.8%|
At first glance, it appears that Priceline’s profit margins are in danger as they are constantly shrinking. Just to clear things up a bit, the company had average net Income margin of 32% (of net revenues) in the last twelve months, something we doubt any other OTA can currently claim. The margins continue to remain healthy even as the margin contractions are on account of investments into booking.com and Agoda.com, which we believe are key drivers of future growth at the Priceline group. We see no red flags or concerns, even though margins in Q4 will continue to be pressurized on account of the investment activity currently underway at the company.
Analyst estimates and guidance for Q4 2013
|Low guidance||High guidance||Mid guidance||Analyst Consensus|
|Revenue (in billions of $)||1.42||1.50||1.46||1.50|
The company guided Q4 revenue growth of 19% to 26% on a Y/Y basis. At the guidance midpoint of 22.5% Y/Y growth, Q4 revenues will be $1.46 billion. The earnings guidance midpoint of $8.05 represents a Y/Y earnings growth of 19% over Q4 2012. The Street is bullish and expects the company to trump guidance on both the topline as well as earnings numbers. The Bloomberg BusinessWeek consensus estimate is an EPS of $8.25 on revenue of $1.5 billion. The revenue consensus is in-line with the high end of the guidance, while the earnings consensus is 2.5% higher than the high end of management guided earnings.
Considering the strong earnings history of Priceline and the strong performance which OTA’s have delivered in Q4 2013, an earnings surprise looks certain. Given the recent hikes by a number of analysts, a miss could result in a significant pullback in the price. However, we are confident of the company delivering a strong quarter. At Amigobulls, we believe that the balance between profitability and reinvestment is critical and we look for companies with solid profit margins and proven cash flow generation abilities with significant growth potential ahead of them. No wonder Priceline is one among our top stock picks. Will bring you the latest numbers post the conference call on Thursday (Feb 20th). Stay Tuned!!
To see Priceline’s latest stock price movement, click here (NASDAQ:PCLN)