Is Priceline Going Where No Stock Has Gone Before?

The rise of Priceline.com (NASDAQ: PCLN  ) shares to a price target that no other S&P 500 stock has reached before speaks to current investor tolerance for high share prices. Two factors driving share prices higher include the Federal Reserve's quantitative easing and the improvements seen in the economy during recent months. Analyst Howard Silverblatt explains in the Wall Street Journal that companies are not engaging in as many stock splits as they have in the past. He mentions that companies tend to have a comfort level around a certain price range they want their shares to trade at. When share prices remain stable but rise above that comfort level, companies are more inclined to split the stock.

That strategy is not used as often anymore because investors are showing less concern about higher-priced stocks. Priceline's CEO Jeffrey Boyd has said that the board had considered splitting the stock, but ultimately voted against it, stating that the company's main focus is managing the business, not monitoring the stock price.

Priceline's second quarter growth in hotel rooms and rental cars

Priceline's latest results were supported by a busy travel season with steady growth in hotel rooms and rental cars. GAAP net income for the second quarter ended June 30 was $437 million, or $8.39 per diluted share, compared to $352 million, or $6.88 per diluted share in the same period last year. Non-GAAP net income for the second quarter was $508 million, up 25.6% over 2012; non-GAAP net income per diluted share was $9.70 versus last year's $7.85.

The company's future investments include content expansion and new market penetration and distribution to build the company's brands. Priceline has five primary brands – Booking.com, priceline.com, Agoda.com, KAYAK, and rentalcars.com – and provides online travel services to over 180 countries. The company's targets for the third quarter include a year-over-year increase in total gross travel bookings of 27% to 34%; adjusted EBITDA increase of about $990 million to $1,055 million; and GAAP net income per diluted share to range between $13.75 and $14.75.

Expedia focusing on new programs and platforms to increase revenue

For Expedia (NASDAQ: EXPE  ) , keeping up with Priceline has been no easy task. Room nights grew 19% year-over-year in the second quarter and revenue margin, or revenue as a percentage of gross bookings, was 12%--an increase of 30 basis points compared to the same period last year. Milestones during the second quarter were the global rollout of the Expedia Traveler Preference program, with successful conversions at major hotel chains. The brand Expedia moved to a new package platform and saw quarterly revenue rise 26%.

There were some headwinds in the second quarter -- net income was $71.5 million, or diluted EPS of $0.51, a decline of 68% from $105.2 million, or $0.76 per diluted share, reported in second quarter of 2012. For the six months ended June 30, Expedia posted a loss of $32.7 million, versus last year's net income of $101.96 million. Some good news for current stockholders – the cash dividend to be paid in September was raised to $0.15 a share.

TripAdvisor expects a bumpy third quarter with new business model

While Priceline and Expedia are known for their discounted pricing, TripAdvisor's (NASDAQ: TRIP  ) focus is helping travelers find the right hotel/flight at the right price. It makes money when users click away to a travel partner's site to book a room or flight. The company's net income for the second quarter was $66.98 million, an increase of 7.5% from last year's $53 million. GAAP net income per diluted share was $0.46 in the current quarter, up 24% from $0.37 reported in 2012.

In June, the company launched its new metasearch feature. It provides real-time hotel and flight pricing and availability on the TripAdvisor site, eliminating the need for users to click away to obtain this information. As users click away less from the site, the fees TripAdvisor collects for referring traffic will decrease. The company is counting on its new business model increasing revenue with higher listing fees and providing higher conversion (booking) rates for its travel vendors.

My foolish conclusion

Despite its steep price tag, Priceline shares have a PEG ratio of 1.11 and trade at 19 times 2014 earnings. Next year's average EPS is estimated to increase to $49.30 from 2013's EPS of $40.23. Earnings are expected to hold steady with a quarterly earnings growth rate year-over-year of 24% and a projected five-year growth rate of 21%. Thomson/First Call analysts regard the stock a "buy" and forecast a share price range between $900 to $1,200, signaling that interested investors should considering buying shares now.

Expedia has a more modest projected five-year growth rate of 11% and is valued at 14 times 2014 earnings. Its lower share price also makes it a more accessible investment choice than Priceline.com. TripAdvisor may need a few quarters to show if their new business model will increase future earnings.

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