Tags: Priceline | Group | Stock | Investment

David N. Frazier: Priceline Group Is Making All the Right Moves

By    |   Friday, 27 Jun 2014 07:30 AM

The Priceline Group Inc. (PCLN) is one of those stocks that appears to be very highly priced, but that’s actually very fairly priced, in terms of its projected earnings growth. Before discussing that matter, let’s review the company’s operations.

Company Description

The Priceline Group Inc., formerly known as priceline.com, is the world’s largest provider of online reservations for airline tickets, hotel rooms and rental cars, serving individuals, families, and businesses through five primary brands – priceline.com, KAYAK, Booking.com, Agoda.com and rentalcars.com.

Through priceline.com’s Name Your Own Price service, which the company promotes via televised advertisements featuring Star Trek’s Captain Kirk – William Shatner – The Priceline Group enables people to specify the price that they’re willing to pay for a particular service. The Norwalk, Connecticut company then accesses databases in which participating travel service providers file discounted pricing rates that are not available to the public to determine whether it is able and willing to fulfill a potential customer’s offer.

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Because its Name Your Own Price service does not disclose the price and the identity of the travel service provider to potential customers prior to them making a reservation through priceline.com, that service enables travel service providers to accept lower prices than their standard advertised prices in an effort to sell their excess capacity without disrupting their existing distribution channels or retail pricing structures.

The company’s priceline.com service generates revenues by purchasing hotel rooms and airline tickets at fixed rates from the providers of those services and then selling those services to its customers at a higher price than what it paid.

Through its KAYAK online service, The Priceline Group enables people to compare airline ticket, hotel reservation and rental car reservation information easily from hundreds of other travel web sites at once. KAYAK derives its revenues from advertising placements on its web sites and mobile applications and from sending referrals to travel service providers. Although KAYAK operates primarily in the United States, The Priceline Group plans to expand that division’s international offerings over the next several years.

The Priceline Group’s Booking.com service is the world’s largest provider of online reservations for hotel rooms, with listings for approximately 495,000 hotels, vacation rentals and other properties in 205 countries. Booking.com guarantees the best prices for any type of property, from small, family-run bed and breakfasts to executive apartments and five-star luxury suites. With its services available in 42 languages, approximately 650,000 hotel rooms are reserved every day on Booking.com.

Booking.com is based in the Netherlands and is supported internationally by The Priceline Group, with 130 offices in approximately 50 countries around the world.

Booking.com’s revenues are derived from commissions that are paid to The Priceline Group for travel related services that are purchased on its web sites.

Through its Agoda.com division, The Priceline Group provides online accommodation reservation services in Asia. The company derives revenues from those services by serving as the merchant of record for those transactions – by charging its customers a markup on the fees that it pays to hotel operators.

The company also serves as the merchant of record for its rentalcars.com service, which is headquartered in Manchester, England.

Rentalcars.com offers its car rental services in more than 6,000 locations throughout the world, with customer support provided in 40 languages. Customers using rentalcars.com can book a full range of vehicles online through one of rentalcars.com's branded web sites, or they can reserve cars by phone.

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After signing a definitive agreement on June 13 to acquire OpenTable, the world's leading online provider of restaurant reservations, The Priceline Group plans to begin offering those same services during the third quarter of this year to diners and restaurants throughout the United States, Canada, Germany, Japan, Mexico and the United Kingdom.

During 2013, more than 15 million diners per month used OpenTable’s service to reserve tables at approximately 31,000 restaurants.

Revenues, Earnings and Financial Condition

The Priceline Group has been very successful in growing its revenues and earnings at a fast pace since the company was founded during 1997. For example, even during the 2008 economic recession, the company grew its net income by 18.2 percent, as compared to the prior year, on a 33.7 percent increase in the company’s revenues.

During each of the past two years, the company grew its net income by 30.9 percent and 34.5 percent, respectively, on revenues increases of 29.1 percent and 20.8 percent for the years ended Dec. 31, 2013 and 2012.

The company continued to grow its revenues and earnings at a fast pace during the first three months of this year, with its revenues increasing by 26.1 percent, and its net income rising by 35.6 percent, during the quarter ended March 31, 2014, as compared to the same quarter a year ago.

Much of that success can be attributed to the fact that The Priceline Group allows executives at each of the company’s operating divisions to use their proven experience and knowledge to manage those operations in the way that they see fit.

For example, after the company’s acquisition of OpenTable is completed, that division will continue to be headquartered in San Francisco, and it will operate as an independent business led by OpenTable’s current management team.

Meanwhile, the company is very strong financially, with its cash and short-term investments in marketable securities alone covering all of its financial obligations by a ratio of 1.9-to-1 as of March 31, 2014.

That strong financial condition places The Priceline Group in a position to continue to expand its operations around the world and to continue to make synergistic acquisitions.

Yet, the company’s stock appears to be trading at a very favorable price, with my research indicating that The Priceline Group will grow its net earnings per diluted share at an average annual rate of around 40 percent over the next three years. PCLN closed Thursday at $1,217.70.

Stock Valuation and Frazier’s Advice for Investors and Stock Market Speculators

With the company’s stock closing Thursday at a price-to-earnings multiple of 32, my estimated 3-year earnings growth rate translates into a P/E to earnings growth (“PEG”) ratio of only 0.81. Hence, stock market participants appear to be undervaluing The Priceline Group’s stock substantially.

Meanwhile, the recent trading action in PCLN indicates that it will continue to rebound over the next couple of weeks from a temporary pullback that occurred from May 30 to June 13.

Therefore, I would advise investors and speculators alike to allocate a portion of their financial market assets to PCLN as soon as they have the funds available.

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David N. Frazier has an extensive background in the investment securities industry and has invested in the financial markets for more than 25 years.

In addition to working as a business analyst, merchant banking analyst and equity research analyst, he’s held positions in sales and marketing at institutional investment firms, including William O’Neil & Co., TDAmeritrade, and Merrill Lynch.

David now serves as the President and Chief Market Strategist of Frazier & Mayer Research, LLC (dba www.TheMarketMonk.com), an independent investment research firm that provides research and analytical services to hedge funds, investment advisory firms, and other investment newsletters.


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The Priceline Group Inc. (PCLN) is one of those stocks that appears to be very highly priced, but that’s actually very fairly priced, in terms of its projected earnings growth.
Priceline, Group, Stock, Investment
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2014-30-27
Friday, 27 Jun 2014 07:30 AM
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