- The US dollar index has weakened by about 3% so far in 2016. If this trend continues, Priceline's international markets will all become automatically more profitable.
- Priceline recently invested a further $500 million into a Chinese company which currently has the biggest market share.
- The recent decline in Priceline stock price has lowered its valuation substantially. Forward looking guidance will be key when it announces earnings.
Priceline (NASDAQ:PCLN) stock looks very interesting at under $1,000 considering that the company derives around 88% of its gross bookings from international markets. This means the dollar has a huge bearing on the company's financials as international earnings are weaker in dollar terms when the dollar is strong. If we look at the dollar chart (see below), we can see that the dollar gained strength in the final quarter of 2015 but has weakened by around 3% so far this year. The company did $1.2 billion in profits last quarter which was $140 million higher than Q3 of 2014 but this wasn't enough to stop the stock from selling off due to weak fourth quarter guidance. Astute investors won't be necessarily looking to the upcoming earnings to see if Priceline can beat the EPS forecast of $10.9 but instead will focus on guidance for the company's Q1 2016. Why? Well, with a dollar index that is presently 3% weaker than previous levels, the company should be giving favorable guidance going forward.
Last quarter we were told that top line growth would slow to lower than historic levels due to unfavorable currency conditions and lower bookings in the US. Therefore, if first quarter guidance demonstrates renewed top line growth, Priceline stock could easily bounce back sharply after earnings. There is no doubt that this company has robust growth drivers which could easily catapult Priceline stock over $1,500 a share. Airline profits don't seem to be slowing down any time soon and are a good bellwether for travel stocks. Yes there may be disruptions (such as the Paris attacks and the Zika breakout) but Priceline's fundamentals remain solid especially when you consider that low oil prices are acting as a hedge currently against potential weakness in the global economy.
Firstly in terms of fundamentals, China definitely offers the biggest growth area for Priceline considering the fact that leisure travel market growth rates are lagging that of developed markets when you incorporate GDP levels into the equation. This is because China's economy is slowly becoming a domestic led consumption based society which means it should be no surprise that its country now has more billionaires than the US. To capitalize on this growing trend, Priceline has pumped almost $2 billion into Ctrip (NASDAQ:CTRP) (another $500 million in December) which means Priceline's current float in the company is around 15%. Ctrip is by far the biggest player currently in the Chinese market accounting for about 50% of total revenues and it is growing fast. Its trailing twelve month revenues are almost $10 billion, nearly doubling the 2013 figure. A monopoly situation currently exists in China as Ctrip also has large stakes in eLong (NASDAQ:LONG) and Qunar (NASDAQ:QUNR) so expected meaningful growth in China's travel industry should be reflected in Ctrip and Priceline stock prices. A growing middle class which will undoubtedly increase the country's internet usage from the current 46% will drive spending in this sector, going forward. Ctrip's next earnings announcement in March should confirm my view.
An even faster company in this sector in emerging markets is "Hotel Urbano" which is growing at an above 60% clip year on year. Priceline's $60 million investment into the company last year may seem low but if Hotel Urbano keeps up the pace at which it is growing, I would expect Priceline to move swiftly here and buy up more stake. Why? Well, Hotel Urbano is the number one player in Brazil because it has done the work on the ground since 2011. The number of hotels in Brazil is expected to reach 70,000 by 2016 with the majority of them still not a part of Hotel Urbano's listings. Funding from Priceline and others will help Hotel Urbano build up its Latin American presence which is bullish for Priceline in the long term. What investors need to take into account is that when a company can't dominate a market (as it failed to in Brazil), it does the next big thing by investing in local high growth companies. The Brazilian real has got hammered against the dollar over the past 2 years, so any dollar weakness going forward plus more listings and increased internet coverage is bullish for Priceline in the long term.
In terms of valuation, Priceline stock is trading at an earnings multiple of just over 20 which is well below its 5 year average of 30.5. Analysts are predicting $10.53 billion in revenue next year on earnings per share of $67. These figures give the stock a forward earnings multiple of 12.4 which, to me, looks cheap for a company still growing its top line meaningfully in the face of sustained dollar strength. Many US internationals (such as Coca Cola (NYSE:KO)) have much higher valuations despite declining top and bottom lines. Priceline is still increasing earnings and sales but because growth has slowed, the market has punished it accordingly. Gross margins are still growing and even if we get a global downturn, dollar weakness and the company's pricing power will act as respective hedges.
To sum up, Priceline has plenty of growth potential despite the pull-back the Priceline stock has experienced already this year. If the market were to price in Chinese growth expectations, I don't think this stock would be anywhere near $1,000 a share. Expansions through the likes of Hotel Urbano are bullish as emerging markets are expected to provide the bulk of the growth in this industry going forward. If forward looking guidance is strong when the company announces earnings in a weeks time, we may never see this stock trading at these levels again.