Priceline: Outlook for 2014
Submitted by Amigobulls as part of our contributors program.
Priceline: Outlook for 2014
Priceline.com announced its Q4 2013 results on Feb 20 after market close. The company reported solid growth in topline as well as earnings growth beating analyst estimates, both of which were covered in our Q4 earnings review of the online travel giant. Following the earnings season and the end to a solid year, it is time to re-evaluate our long term investment outlook. Our discussion today evaluates the valuation of Priceline and also our expectations with regard to the price movements in the PCLN stock. With close to 90% gain in the last one year (up to Feb 28, 2014), the obvious question now would be; is there any further upside to this red-hot pick and can the company continue to grow into its current valuations?
Historical performance
Let’s look at the historical performance of the company before getting to our future expectations. We look into Priceline’s performance over the last 3 years with a focus on revenue growth and earnings growth.
Priceline has seen continued topline growth beating industry peers year and year again. Its nearest competitor by revenue, Expedia, is the most appropriate OTA (Online travel agent) to compare Priceline against. Let’s take a look at the revenue and earnings growth rate at Expedia over the last three years.
One look at the two tables above tells us that Priceline has come ahead of Expedia when the metric has been topline growth. In terms of earnings growth as well, Priceline has had more consistent and faster growth as compared to Expedia. A better metric to compare the two firms over the last three years is their three year revenue and earnings CAGR (Compounded Annual Growth Rate).
The three year comparison of growth in topline and bottom line throws up the clear winner in the two giants from the OTA industry. While Priceline is the clear winner in the above comparison, does it get a premium valuation it deserves? It would be interesting to look at the current valuation multiples of the two firms.
Relative valuation: PCLN v/s EXPE
The table below gives the current valuation multiples of Priceline and Expedia as of 28 Feb closing price.
The above table makes two facts clear: Priceline enjoys a premium valuation in terms of P/S multiple while Expedia enjoys a more premium P/E multiple. So, why is there a discrepancy in valuation? The answer lies in the fact that Priceline generates significantly high profit margins as compared to its industry peers. While Expedia might be easily able to grow topline to justify its current P/S multiple, the critical question is, can it convert a significant part of topline growth into bottom line growth as well? Only then will one be able to justify Expedia’s higher P/E multiple. We think P/E is a better measure to compare the two companies considering the fact that they are both profitable.
Looking at the significantly different P/E multiples of these two companies, do we have a case of mispricing here? Considering the current valuations of the two OTA’s we are convinced that Priceline presents a better risk to return profile between the two investments. This is mainly on account of two reasons: firstly, Priceline has a more consistent bottom line and higher profit margins as compared to Expedia and secondly, the growth at booking.com and Agoda.com seems to be only getting better with each passing year, fuelling topline growth further ahead of Expedia’s growth. As we feel Priceline is a better option as compared to Expedia, let’s look at the question of where is Priceline headed over the next one year?
Priceline: 2014 Outlook
Our outlook is based on a positive growth trend in the global travel industry. According to a report by ITB world travel trends, the global travel industry is set to see better growth in 2014, with the strongest growth in the Asia Pacific and South American regions. The table below details the travel growth in various regions around the world.
The improvement in the overall industry will positively impact the players in the entire industry, driving growth and profitability at the OTA’s.
Priceline.com will particularly benefit from stronger growth in Europe and Asia, two key markets it is gaining traction in through its subsidiaries Booking.com and Agoda.com respectively. Combining the positive industry trend with the potential impact on Priceline.com, our 2014 estimates of Priceline are given in the table below.
As per our estimates we expect the company to report Non-GAAP earnings per share of $52.66 on revenue of $8.67 billion for FY 2014. From here the valuation process gets easier. The firm currently trades at 31.6 times its 2013 Non-GAAP earnings. However, keeping in line with our principles of conservatism, a multiple of 28 to 30 times the 2014 earnings will be a more appropriate multiple to value the company based on its current outlook. For the purposes of our valuation we have used a multiple of 28 times the company’s expected 2014 earnings.