Priceline Forex Losses, Floods Could Weigh on $588 Value

In the recently released third quarter results, Priceline.com (NASDAQ:PCLN) reported robust growth across the board while highlighting the expectation of a modest deceleration for the remainder of 2011. Our revised price estimate of $588 for Priceline, reflects the continued growth momentum at the hotel bookings business. The hotel business also drove gross booking growth at competitor Expedia (NASDAQ:EXPE) this quarter but accounts for a lower percentage of the stock’s value as compared to Priceline. While we expect Priceline to continue its winning run with the hotel bookings market share, there are some factors such as foreign exchange volatility and the recent flooding in Thailand that represent a potential downside to our estimate. Below, we take a closer look at them and discuss their implications for Priceline’s valuation.

See our full analysis for Priceline here

Europe Debt Crisis Can Slowdown Growth Through Adverse FX impact

With international operations contributing almost 78% of the gross bookings, year-to-date, Priceline has significant exposure to foreign currency denominated assets. The online travel agency is conducting a significant and growing portion of its business outside the United States and reports results in U.S. Dollars, hence facing exposure to adverse movements in currency exchange rates with the translation of financial results of international operations from local currency into U.S. Dollars upon consolidation.

Europe represents a core market for Priceline and it continues to expand its presence in the region through the hotel business, Booking.com. Therefore, a weakening Euro represents a headwind for Priceline as it decreases the Euro-denominated net assets, bookings and income on conversion to U.S. Dollars. For the September quarter, revenue from international operations grew on a local currency basis by approximately 68% y-o-y, while the positive impact of currency exchange drove a growth of 79% in U.S. Dollar terms.  While forex rates provided a substantial tailwind to the results expressed in U.S. dollars for the last two quarters, Priceline does not expect the same to continue in the fourth quarter.

With the sovereign debt issues facing Europe largely unresolved, continued volatility in the euro-dollar exchange rate can adversely impact U.S. denominated results for the company going forward. Though some hedges have been set in place to shield fourth quarter net earnings, these are only short term in nature and do not cover earnings beyond 2011. Priceline expects fourth quarter revenue to grow year-over-year by approximately 27% to 32%, slower than the 35% growth seen in the same period last year.

Asia Pacific Bookings Threatened by Thailand Flooding

In the past quarter, Asian booking volumes at Priceline were adversely affected by severe flooding in Thailand which is a key market for its hotel booking business, Agoda and the Asian business of Booking.com. While Booking.com has a broader geographical scope including European, American and Asian markets, Agoda largely caters to the Asia Pacific region. However, because of the size and the balance of all the other businesses, the impact of the flooding to date has not been material to the consolidated results.

The concern was, as the floodwaters would encroach on the major tourist spot, Bangkok. With the floodwaters inundating seven industrial estates north of Bangkok, crippling global supply chains, there could be a marginal downside to the stock’s value if the impact of the flooding in Bangkok worsens. This can lead to lower gross bookings through a decline in Asian hotel booking reservations and also drive down average daily rates due to excess inventory in the region.

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