Source: Priceline.com
Blue chip stocks are remarkably solid companies, typically market leaders in their respective industries with proven track-records of success and unquestioned financial strength. World class names such as PepsiCo, Johnson & Johnson and Procter & Gamble usually come to mind as well established blue chip stocks, while Apple could easily be on its way to consolidating its place as a blue chip stock due to its tremendous brand value and impressive cash flow generation.
Blue chip stocks provide many advantages for investors, such as safety and reliability, usually combined with generous dividends and share buybacks. On the other hand, it tends to be quite difficult for big companies in mature industries to find growth opportunities, so blue chip companies are generally not the most exciting growth names in the market.
Keeping this in mind, looking for the next blue chip stocks and buying them while they are still young and rapidly growing can be a smart strategy to maximize returns. As a company proves to investors that it has what it takes to be included among the best quality names, gains for shareholders can be substantial over time.
Today a strong contender to reach the blue-chip Priceline.com (BKNG 1.56%) stock and a few important reasons why the global leader in online travel seems to be clearly moving in the right direction when it comes to earning a place among the best blue chip stocks over the coming years.
The business
Priceline is the undisputed global leader in the online travel industry. While rival Expedia (EXPE 2.02%) has a bigger presence in the U.S., Priceline leads by a wide margin in international markets. The company produced $13.54 billion in gross bookings during the second quarter of 2014, with $11.68 billion coming from international markets.
Expedia generated a similar $13.05 billion in gross bookings over that period, but nearly 60% came from the U.S. Importantly, Priceline is more efficient than Expedia at translating gross bookings into sales: Priceline registered revenue of $2.12 billion in the second quarter versus $1.49 billion for Expedia, so the disparity in sales is much bigger than the relatively small difference in gross bookings.
Online travel agencies provide a remarkably valuable service to both travelers and industry operators. Occupation is a key factor for profitability in industries like hotels, airlines, and car rentals: The additional cost of accommodating one more guest in a hotel room is almost irrelevant, so it makes a lot of sense from a financial point of view to offer steep last-minute discounts if the room is going to otherwise remain empty. The same goes for an unoccupied seat in a plane, or an unused rental car.
But offering aggressive discounts can tarnish a brand, making it difficult to convince clients to pay regular prices if they have become accustomed to big bargains. Using online travel agencies to offer last-minute deals under special conditions, companies can clear their inventory by selling to bargain hunters, while at the same time protecting their brand and image.
Needless to say, clients are more than happy with these kinds of deals, which can be outstandingly cheap. Comfort, efficiency, and transparency are additional advantages for travelers when it comes to choosing online travel companies over traditional sales channels in the travel business.
The numbers
Priceline has delivered truly outstanding financial performance while capitalizing on its opportunities for growth over the last several years. Sales have increased at 29.2% annually through the last five years, while earnings per share expanded at an even faster rate of 57.4% per year over that period.
The company continues firing on all cylinders as of the last quarter: Gross travel bookings increased 34% during the second quarter of 2014 to $13.5 billion. Total sales grew 26% to $12.12 billion, while adjusted net income came in at $667 million, a 31% increase versus the prior year.
Priceline does most of its business via the agency model, which means allowing hotels and other operators to list their own offers and prices, paying the company a commission for every transaction. This means the company assumes no inventory risk on most of its sales, and it allows Priceline to generate growing profit margins as it spreads its fixed costs on a growing revenue base.
PCLN Operating Margin (TTM) data by YCharts
Sustained sales growth, in addition to expanding profit margins, should provide a double boost to earnings over the coming years, so investors in Priceline stock have valid reasons to continue to expect strong earnings growth from the company.
Bottom line
Priceline benefits from a leading position in the promising online travel business, and the company is transforming its opportunities for growth into remarkable financial performance for investors. The online travel leader seems to be on the right path to becoming a blue chip stock over the long term, and this looks like a convenient scenario for investors in Priceline stock.
