Priceline Stock Still Attractive Post Strong Q2

  • Priceline reported a strong Q2 performance, though missing revenue estimates marginally.
  • The company beat consensus EPS estimates by 4%, with a Non-GAAP EPS of $12.51 in Q2.
  • The current valuation multiples, future growth opportunities and M&A activity make Priceline an attractive investment in the OTA space.
  • We reiterate our positive long term outlook on Priceline stock post Q2 results, as reflected in our Priceline stock analysis.

PCLN Q2 2014 earnings review

Priceline(NASDAQ:PCLN), the largest OTA (Online Travel Agency) by revenues announced its Q2 2014 results before markets opened yesterday, August 11. Priceline reported Non-GAAP EPS (earnings per share) of $12.51, crushing analyst consensus of $12.02. The company delivered solid growth across topline, bottomline and free cash flow, making this yet another stellar performance from the company. Priceline stock has been among our top stock picks for close to 15 months, delivering a 64% return since its inclusion. We take a look at the quarterly performance and update our Priceline stock analysis.

Agency Revenue drive Priceline Q2 growth

Priceline reported a Q2 revenue growth of 26.4% YoY, driven by a 38.5% YoY growth in Agency revenues. Agency revenue contributed 69% of total revenues, up from 63% contribution in Q2 2013. The higher revenue share from Agency revenues led to a 36% YoY growth in gross profit as agency revenues are recorded on a net basis and don’t have accompanying cost of sales. Priceline’s Q2 2014 growth metrics are summarized in the table below.

In millions of $, except EPS

Q2 2013

Q2 2014

YoY growth

Gross bookings

10118

13538

33.8%

Revenue

1680.24

2123.58

26.4%

Gross Profit

1383.86

1883

36.1%

ADJ EBITDA

621.26

809.43

30.3%

Non-GAAP EPS

9.7

12.51

29.0%

GAAP EPS

8.39

10.89

29.8%

TTM free cash flow

1885.05

2281.98

21.1%

Solid gross margin expansion drives Priceline Earnings growth

As stated earlier, the higher revenue share of agency revenues drove gross profit growth ahead of revenue growth, which led to a 6.3% YoY improvement in gross profit margin. However, the operating costs outpaced gross profit growth, leading to a less than proportionate expansion in Operating profit margin, Adjusted EBITDA margin and Net Income margin. The profit margin changes over Q2 2013 are given in the table below.

Profit margin analysis

Q2 2013

Q2 2014

Change

Gross profit margin

82.4%

88.7%

6.3%

Adj EBITDA margin

37.0%

38.1%

1.1%

Operating margin

33.0%

34.5%

1.5%

Net Income margin

26.0%

27.1%

1.1%

The operating expenses (Op Ex) growth, at 38.1% YoY was fuelled by 80% growth in Offline advertising expenses followed by a 54% increase in depreciation and Amortization and 38% growth in Online advertising expenses.

Priceline Cash flow analysis

Priceline churned out huge free cash flows for yet another quarter. The TTM (Trailing twelve month) free cash flow registered a 21% YoY growth, even as the company added $454 million to its cash and cash equivalents balance at the end of Q2. The total cash balance at the end of the quarter, at $7.2 billion registered a 20% YoY growth inspite of a $1.5 billion payout for the OpenTable acquisition, partly funded by debt. The solid growth in free cash flow and cash balance once again highlighted the huge cash generating ability of Priceline.

Q2 was definitely a strong quarter for Priceline. However, an important question is if the company can continue to grow its earnings and revenues at such a clip. Priceline Q3 2014 guidance is summarized below.

  • Year-over-year increase in total gross travel bookings of approximately 19% - 29% (an increase of approximately 18% - 28% on a local currency basis).
  • Year-over-year increase in international gross travel bookings of approximately 22% - 32% (an increase of approximately 21% - 31% on a local currency basis).
  • Year-over-year increase in domestic gross travel bookings of approximately 10% - 15%.
  • Year-over-year increase in revenue of approximately 15% - 25%.
  • Year-over-year increase in gross profit of approximately 21% - 31%.
  • Adjusted EBITDA of approximately $1.265 billion to $1.365 billion.
  • Non-GAAP net income per diluted share between $19.60 and $21.10.
  • ·

The management’s Q3 guidance was below consensus estimates, implying a Q3 Non-GAAP EPS growth of 17.6% at its midpoint. Analyst consensus stood at Q3 EPS of $21.13 (Source: Yahoo finance).

A peek into the next two quarters

Priceline will continue to invest in OpenTable over the next two quarters. However, the acquisition could be slightly accretive in Q3, as stated in the conference call.

Darren Huston, CEO of Priceline mentioned in the conference call with reference to OpenTable plans:

“It is only a couple of weeks since the deal closed, so we are in the process of charting the path forward with the OpenTable team, but we intend to increase investment in Q3 and coming quarters, to position the business for future growth. We expect that the impact of the OpenTable acquisition on our non-GAAP EPS for Q3 will be slightly accretive.”

“We did a lot of planning and we're now in the execution phase of those plans. As we highlighted during the acquisition it's really three areas we're focused on. The second area is co-marketing and that's something that's in the plans right now and then finally was the payments area and you have the update on that so I feel really good about where we are and there's lots of work to do. And I think by 2015, I hope, we'll be in full rollout of those plans.”

The focus on international growth and payments will accelerate Opentable revenue and earnings growth while the co-marketing effort could lead to cross selling benefits for both Opentable and other Priceline group brands.

The other areas of investment will be the hotel marketing services of Priceline, which the company offers to its hotel partners across the globe.

Another key driver of future growth will be Priceline’s latest partnership with Ctrip, the largest Chinese OTA. The partnership will enable cross selling of inventory, opening up a wider market for travellers visiting either of the OTA’s.  Ctrip is the largest player in the Chinese OTA space and with the partnership Priceline has gained access to over 100000 properties in the greater China region, which is a significant addition to Priceline.

Priceline: Attractive valuation multiples

Priceline continues to be attractively priced in the OTA space. The below table displays Priceline’s PE ratio and Price-to-sales ratio in comparison with sector peers Expedia and Orbitz Worldwide.

Relative valuation

(as of August 11 closing prices)

Priceline

Expedia

Orbitz Worldwide

PE ratio

32.73

33.85

52.24

price-to-sales ratio

9.07

2.07

1.12

PEG ratio

1.33

1.55

1.25

one year forward PE

25.86

23.76

38.61

PEG ratio is the best measure of valuation as it compares the future potential earnings growth with the PE ratio of a firm. Though Orbitz worldwide has a lower PEG ratio than Priceline, Priceline’s stable profit margins, higher earnings growth and huge cash flows make it an attractive investment in the OTA space.

In conclusion, focus on the APAC region will drive the future growth of Priceline as markets in US and Western Europe mature. Priceline’s focus on hotel reservations and payments through OpenTable, will help to drive growth in the domestic markets, which lag the international operations of the group. The investments over the next two quarters could depress profitability, but these will drive Priceline’s long term earnings growth. Moreover, recent acquisitions of OpenTable & Buuteeq and Priceline’s partnership with Ctrip bring to the fore Priceline’s willingness to consider inorganic routes of growth. Priceline’s huge cash balances could help support acquisitions in case the management identifies any new avenues of inorganic growth. We continue to reiterate our positive long term outlook on Priceline, which is reflected in our current Priceline stock analysis.

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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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