Stock Advisor Buy List: Priceline

At Motley Fool Stock Advisor, we're all about finding stocks with huge long-term upside. Our research efforts double down on a company's growth potential, competitive advantages, and management quality.

Let's see why priceline.com (Nasdaq: PCLN  ) currently makes our buy list.

Growth potential
Priceline currently trades at about 30 times normalized earnings. After removing net cash, it trades at about 20 times earnings before interest, taxes, and depreciation (EBITDA). Current consensus analyst estimates call for 25% annual earnings-per-share growth, and 27% EBITDA growth over the next two years.

One of Priceline's most attractive growth prospects lies in Europe, where Booking.com -- purchased by Priceline in 2005 -- has thrived since the recession began. Europe's travel market may be mature, but online booking of travel accommodations there has plenty of room to grow.

Since a good deal of its expected growth comes from an area of the world mired with government debt issues and growth-impeding austerity measures, it's no wonder that Priceline's stock has taken a tumble lately. But the key to Priceline's growth in Europe may not be the growth of the overall travel market, but the growth of online travel bookings -- primarily hotel reservations for Booking.com. In Europe, only about 32% of travel bookings occur online, compared to over 50% in the U.S.

Last year, Europe's online travel bookings held steady, while the overall travel market in Europe declined 10%. Online travel bookings are expected to grow 8% this year, despite a weak overall travel market, as more Europeans look for deals on the Internet when making travel arrangements.

Competitive advantage
You may find it hard to argue that any online travel agency has a durable competitive advantage, but the closest candidate may be Expedia (Nasdaq: EXPE  ) . It has largest scale in the industry, and as it grows, its network becomes more valuable. While Priceline may lack a conventional competitive advantage, it seems to have an edge in Europe, where it's outgrowing its competition.

Europe's travel market is highly fragmented, particularly in the hotel market; in contrast, the U.S. hotel sector is largely consolidated by large chains such as Holiday Inn and Marriott (NYSE: MAR  ) . In Europe, Priceline enjoys pricing power over fragmented suppliers of hotel rooms, which leads to wider margins than in its U.S. business.

Competitor Orbitz Worldwide (NYSE: OWW  ) focuses its strength on airline bookings and lacks the scale of Priceline in Europe. But Orbitz maintains ambitions to expand into that market, after consolidating all of its travel websites onto one technology platform in 2008 in an attempt to increase its scale.

Expedia is a closer comparable to Priceline, with a major presence in Europe and the majority of its revenue coming from hotel bookings. Expedia CEO Dara Khosrowshahi recently acknowledged that the company's growth in Europe lags that of Priceline's Booking.com, but plans to compete with its own offering, Venere, which Expedia acquired in 2008.

Management quality
Jeffrey Boyd has held Priceline's CEO position since 2002, and done a wonderful job growing the business. An $80 million company when Boyd took the helm, it's a more than $10 billion business today, with attractive growth potential still remaining. Insiders own about 1.5% of shares outstanding, which represents about $160 million in value. On the downside, Priceline packs a poison pill provision that could significantly dilute shareholders and/or prevent them from benefitting from a buyout attempt at a premium to its current price.

As a side note, Barney Harford, CEO of competitor Orbitz, visited us at FoolHQ in May. I asked him which of his competitors he admires the most, and whether he could relate that admiration to the rival's recent or current initiatives. Harford quickly cited Booking.com by a large margin, telling us that Orbitz is currently trying to emulate and improve on that site's model. When even your archrivals envy and admire you, you must be doing something right.

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In the meantime, let us know what you think of Priceline in the comment section below. Does it make your buy list?