Pricline Jumps on Broker Initiations: Are They Smoking Something?
Priceline (NASDAQ:PCLN), one of the leading online travel agencies saw a near 15% jump in its share price over the last week, triggered by initiation reports published by Credit Suisse and Barclays. CS launched coverage for the stock with a price target of $720, which is a considerable premium of ~40% over its current price, while Barclays has a more conservative $600 target price that suggests 15% upside. Priceline offers consumers a wide range of travel services including bookings for hotel stays, airline tickets, car rentals, cruises and vacation packages and competes with the likes of Expedia (NASDAQ:EXPE), Orbitz (NASDAQ:OWW) and Travelocity. We decided to delve into what it would take for Priceline to achieve such price levels, as suggested by the Credit Suisse report and identified hotel bookings market share and hotel room average daily rates as potential sources to enhance value.
We currently value Priceline with a $520 Trefis price estimate, which implies a slight premium to the current market price.
Hotel bookings account for over 90% of the Trefis price estimate for Priceline. Therefore, the drivers of this segment would have the maximum impact on the stock price.
Since we don’t have access to the CS model, we considered the following scenarios under which the stock can reach a valuation of $720 per share using the Trefis model.
Increase in market share of hotel rooms sold by Priceline
If the hotel bookings market share of Priceline increases at a higher rate and reaches 4.4% by the end of Trefis forecast period beating the forecast under Trefis model by ~1.5 percentage points, the per share valuation jumps to $720.
Priceline can achieve this through a further strengthening of its foothold in international markets by leveraging its existing portfolio of brands which include Booking.com, Booking.com BV and Agoda. Booking.com provides a foothold in the larger international (European) hotel market while Agoda helps it tap the Asian markets. However, increasing competition from other online travel agencies and suppliers can eat into Priceline’s market share.
Increase in the Average Daily Rate (ADR) per Hotel Room received by Priceline
If the Priceline ADR per Hotel Room rises more steeply and reaches $260 by end of Trefis forecast period, well above the $180 currently built into the Trefis model, this could command a valuation of $720.
A surge in consumer demand is expected to help Priceline witness a sustained increase in ADR per Hotel Room as the suppliers increase their prices at a faster pace to recoup losses due to the worldwide recession last year. However, this would be challenging amidst competitive hotel pricing and lowering of fees on hotel reservations in the future, which can negatively affect Priceline’s ADR.
While these factors independently could help Priceline reach $720, we don’t currently expect either of them to occur. We outline them in an effort to illustrate how sensitive the stock is to these two factors. Of the two scenarios mentioned above, an increase in market share seems more feasible than increasing ADRs.
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