- Priceline continued to outperform in 2014 on all major fundamental metrics.
- However, the stock sidetracked for a major part of the last year and now presents an attractive risk/reward profile for long term investors.
- The lowered valuations and improved fundamentals make Priceline an attractive investment in 2015.
Priceline (NASDAQ: PCLN) has been one of our top stock picks for over a year and a half, returning a solid 56%, handily beating 45% gains in the NASDAQ composite and a more comprehensive margin over 28.4% gains in the broader S&P 500 benchmark. Our bullish outlook on the stock is summarized in our Priceline stock analysis video.
While past performance is no indicator of future returns, we think Priceline is one horse for the long distance race. So why is it that we like Priceline and continue to fancy chances of good returns from the stock in 2015?
Strong growth in gross bookings
Priceline gross bookings continued to grow rapidly through 2014, marginally eclipsing the gross bookings growth of its prime competitor Expedia (NASDAQ:EXPE). Priceline registered total gross bookings of $50.3 billion, registering a YoY growth of 28.4%, marginally ahead of Expedia’s 27.9%.
Priceline vs competitors gross bookings growth
Priceline take rate a key driver of Priceline revenue
While gross bookings growth was marginally ahead of Expedia, the big differentiator and driver of Priceline revenue is its higher take rate (revenue/gross bookings) as compared to its competitors. The company continued to maintain its superior take rate, which was a key driver of its topline growth.
The superior take rate on the back of stronger growth in gross bookings saw Priceline revenue growth trump that of Expedia as well as Orbitz worldwide for 2014.
|Revenue growth||2014||5-year CAGR|
Priceline topline outgrew its competitors in spite of a larger revenue base, which indicates the strong growth levers enjoyed by the company.
Profitability and earnings
Profitability has been another of the strong margins at Priceline. While its competitors have struggled with inconsistent bottomline performance, Priceline once again proved its profit taking abilities with vastly superior profit margins.
Priceline reported a 90 bps increase in operating margins and 80 bps increase in Net margins as compared to 2013. While Expedia reported higher increases in profit margins, Expedia profit margins were far lower than Priceline profit margins.
In our opinion, higher revenue take rate and bigger profit margins are significant levers of Priceline’s value as an investment. These are the primary numbers which drive Priceline’s consistent and solid earnings growth.
|EPS growth||2014||5 year CAGR|
While Expedia reported a higher earnings growth in 2014, it should be noted that the company’s EPS of $3 is 12% lower than its EPS in 2011. Expedia EPS had fallen by over 50% from 2011 to 2013. Considering the dip in Expedia’s EPS, the 5 year CAGR would be a more accurate measure of the earnings growth of the companies. Priceline, with a 5 year average annual earnings growth rate of 35.9%, clearly has the best track record as far as long term earnings growth is concerned.
In summary, a review of the OTA sector reveals that Priceline outperformed its sector peers in 2014 on topline growth as well as earnings performance. The key metrics of gross bookings growth, revenue take rate and profit margins remained ahead of the competition, making the Priceline stock a fundamentally strong investment option.
Priceline continued its strong fundamental performance throughout 2014. However, the same hasn’t translated into better stock returns as the stock has underperformed Expedia and Orbitz as well as the broader market indices since Feb 2014.
Priceline valuation multiples have moved significantly lower the last one year. The stock is currently trading at the following multiples.
- PE ratio of 27.16
- Price-to-sales ratio of 7.69
The Priceline stock sidetracked for a major part of 2014, bringing the valuations down even as the revenue and earnings growth continued. The stock is attractively priced, in comparison to competitors. The important valuation metrics for the three companies are summarized below.
|Current Price (March 3, 2015 close price)||1242.03||91.02||11.59|
|one year forward PE*||18.24||19.37||24.15|
*sourced from Yahoo finance
Priceline is the most attractive stock based on the relative valuations, irrespective of the measure of choice. The strong fundamentals, in combination with attractive valuations make Priceline a stock to own.
Priceline’s valuations multiples are significantly lower than its average multiples over the last one year. The stock has traded at the following average valuation multiples:
- Average PE ratio of 30.15 over the last one year
- Average price-to-sales multiple of 8.36 over the last year.
Using the analyst consensus earnings and revenue estimates for 2015, we arrive at a one year target price for Priceline assigning conservative valuation multiples.
|Current||One year average|
|Price to sales ratio||7.69||8.36|
|Expected EPS 2015||57.59|
|Expected Revenue 2015||9.36|
|Target price (at PE of 25)||1439.75|
|Target price (at PS of 8)||1433.209|
We update our one year Priceline target price of Priceline to $1433, which is the more conservative of the two approaches used. Our target price implies a 15.4% upside from the last closing price on March 3. You can also watch our Priceline stock analysis, which summarizes our bullish outlook on the Priceline stock.