Priceline (NASDAQ:PCLN), the leading OTA announced its Q4 results yesterday (Feb 20) after market close. On a day marked by a number of earnings releases from the technology sector companies, the biggest and most convincing numbers were from this giant of an OTA, bringing along another huge beat to make it more than 10 consecutive quarters of earnings surprises. The key to Priceline’s earnings growth has always been its industry leading profit margins. This quarter was no different with an operating margin of 37% and Net Income margin of 30%, in an industry where most others are struggling to make good their costs. A tremendous performance no doubt, but the stock’s 25% gain in the last 3 month raises the obvious question in the minds of investors, Can Priceline continue to grow at the rate it currently is running at? At Amigobulls, we believe that the firm will continue to outgrow its current valuations and makes a stronger bull case than many other stocks out there, even at its current valuations.
Today we take a look at the Q4 numbers, our expectations over the coming quarters and also where we think the stock is headed over the coming quarters and why we think so. Read on!!
Q4 2013 performance
Priceline reported topline growth of 29.4% Y/Y, with the gross profit growing 42% Y/Y. As we had mentioned in our preview we track the company based on the Gross profit growth as that number essentially represents the net income to the Priceline group. However, 5% of the gross profit growth is attributable to inorganic growth through revenue from Kayak in Q4 2013. The adjusted gross profit growth was in excess of 35% against the Q4 2012 gross profit growth of 30%. Let’s take a look at the segmental growth rate.
|2012 Q4||2013 Q1||2013 Q2||2013 Q3||2013 Q4|
|Agency revenues (Booking.com)||31.9%||43.2%||37.9%||41.0%||39.8%|
|Merchant revenues (mainly "Name Your Own price" & "Express Deals"||5.9%||6.5%||5.3%||6.1%||2.0%|
|Other revenues (Kayak)||13.1%||9.6%||846.1%||2158.5%||1749.5%|
The Agency revenues continued to drive revenues to a large extent. Booking.com, making the lion’s share of agency revenues was the key revenue driver in Q4 2013, a fact confirmed by the company in the conference call. Also another important fact is the significant traction seen in the ‘Express Deals’ revenues, which largely offset the slowing growth from the ‘Name Your Own Price segment.’ It is not wise to read too much into the seemingly huge growth in the other revenues as the 2013 numbers represent income from kayak, distorting the comparisons to the year ago period to that extent. Also ‘other revenue’ currently represents a very small proportion of Priceline’s revenues, as is shown in the chart below.
All in all, the growth rate was healthy and outpaced the Y/Y growth in Q4 2012, a fact adding weight to the fundamentals supporting the company’s stock.
While topline growth, even at its current revenue levels, is partly responsible for the bullish outlook on the company, what has truly set the company apart is its operating efficiency and the resultant profitability levels. It is worthwhile to take a look at the Q4 2013 profit margins and the Y/Y change in them.
|2012 Q4||2013 Q4||YoY change|
|Gross profit margin||78.9%||86.5%||7.6%|
|Operating margin (as % of gross profit)||39.8%||37.6%||-2.3%|
|Net margin (as % of gross profit)||30.7%||28.4%||-2.4%|
The company continued to see improvement in gross profit margins as the agency revenues contributed a larger share of the revenue. The improving gross margins were in line with our expectations for Priceline, as mentioned in our earnings preview. Moving on to the operating margins, Q4 2013 saw marginal contraction as the company continued to invest in expansion related costs like IT, G&A and Personnel expenses. In line with our expectations and management’s earlier comments in Q3 2013 conference call, the advertising expenses saw a 3x increase as the company focused on TV campaigns related to advertising booking.com in the United States. The overall impact of the increase in the various operating expenses was a 230 basis point reduction in the operating profit margin (as % of Gross profit) of the company. The Net Income margin was negatively impacted by negative foreign currency movements resulting in overall contraction of 2.4% as compared to Q4 2012. The deleveraging in margins isn't something which is going to concern us, with Q4 2013 margins healthy at operating margin of 37.6% and Net Income margin of 28.4%.
The cash flow generation and cash position of the company continued to remain strong, which is something we absolutely love and immensely value in our stock picking decisions. Cash flow from operations, at $554 million saw a Y/Y increase of 12%, reiterating our belief that the company is a cash machine. The cash and cash-equivalents balance of $6.8 billion, at the end of the quarter was more than healthy with a 2 times coverage of Priceline’s operating and capital expenses spend in 2013.
Actual performance v/s estimates
|2013 Q4 analyst consensus||2013 Q4 actual performance||surprise/beat %|
|Revenue ($ in billions)||1.52||1.54||1.3%|
Priceline comfortably beat analyst estimates reporting revenues $20 million greater than the consensus estimate of $1.52 billion. The reported earnings included a 7% earnings surprise, making it over 12 consecutive quarters of earnings surprises the company has reported. While the past performance has been great, it is the guidance for the current quarter (Q1 2014) which was below estimates.
Q1 2014 guidance
The table below summarizes the management’s Q4 2013 guidance
|2013 Q1||2014 Q1 guidance midpoint||YoY growth|
|Revenue ($ in billions)||1.30||1.56||20.0%|
|Gross profit ($ in billions)||1.01||1.28||27.0%|
We have used the midpoint of the guidance range in our calculations. The guidance represents a gross profit growth of 27%, which is significantly lower than the 36% growth in Q1 2013. The guided growth in EPS, at 14.6% is also significantly lower than the 34% growth in Q1 2013. We did expect a slow-down in earnings on account of the company’s continued investments into the booking.com and Agoda businesses, but we think the guidance is highly conservative. We now highlight our outlook for Q1 2014.
Considering the potential improvement in the global economic climate, particularly in US and Europe over the coming quarters and keeping in mind the shift in the revenue mix at Priceline, we expect Q1 2014 Non-GAAP EPS of $6.87 on revenue of $ 1.62 billion. Based on our Q1 expectations, we think the stock is currently fairly priced and should trade in the range of $1300-$1350 over the next two months. Any investors looking for long term positions should look for a pullback in price in order to make meaningful gains. On the other hand investors already long on the stock could look for furthering their upside from the stock. We continue our long term positive outlook on the stock heading into the FY 2014. Keep reading for our latest updated valuation of Priceline Inc. and other technology stocks.
To see Priceline’s latest stock price movement, click here (NASDAQ:PCLN)