Source: Priceline.
Priceline (BKNG -0.45%) is an exceptional growth business, producing sky-high profitability and offering abundant opportunities for expansion. However, investors seem disappointed with the company lately, and Priceline stock has fallen by nearly 15% from its highs of the year. Let's take a look at Priceline and why it may be a good time to invest in this dynamic growth story.
The business
Priceline is the global market leader among online travel agencies: Through its multiple platforms the company offers online hotel bookings, plane tickets, and car rentals. In addition, Priceline has recently bought OpenTable, the industry leader in online dinner reservations.
Priceline's closest competitor is Expedia (EXPE 0.55%), which owns a leading position in the U.S. Approximately 58% of Expedia's $13.5 billion in gross bookings during the third quarter came from the U.S. Priceline produced a similar $13.8 billion in gross bookings in quarter, but more than 87% of that money came from international markets.
Both Priceline and Expedia are generating impressive growth rates, which shows the online travel industry is offering abundant room for expansion. Priceline announced an annual sales increase of 25% to $2.62 billion during the third quarter, while Expedia reported a 22% increase in revenues to $1.71 billion.
The company keeps consolidating its leadership position in the industry; Priceline's Booking.com platform reached 540,000 hotels and other accommodations in 207 countries as of the third quarter, up 52% over the same period last year. Customers booked accommodation reservations for 95 million room nights, an increase of 27% year over year
The business model is enormously profitable; Priceline has an operating profit margin in the neighborhood of 47% of revenues. Earnings per share during the last quarter jumped 28% versus the same period in the prior year, a kind of performance most companies of Priceline's size can only envy.
The context
Both sales and earnings came in above analysts' expectations during the last quarter, however, Priceline is expecting a material deceleration in growth for the December quarter: Management expects revenue growth to be in the range of 11% to 18% and gross profit growth to be between 17% and 24%.
This is a fairly wide range, and Priceline typically provides conservative guidance figures, so there is a considerable chance that the numbers will actually come in above the company's guidance. On the other hand, the depreciation of the euro versus the U.S. dollar is being a drag on performance.
In the words of CFO Dan Finnegan:
Obviously, the deterioration in the euro exchange rate over the last couple of months is indicative of weakening economic conditions in our most important market, which is of concern as we look at the business going forward.
We've hedge contracts in place to substantially shield our fourth quarter EBITDA and net earnings from any fluctuation in the euro or the pound versus the dollar between now and the end of the quarter, but these hedges do not offset the impact of translation on our gross bookings, revenue, gross profit or operating income, and do not hedge our earnings beyond the fourth quarter.
The opportunity
It's hard to tell how long it may take for macroeconomic conditions in the euro-zone to improve, or how much damage a depreciating euro can cause on Priceline's business over the coming months. But the fact remains that currency fluctuations are an external and transitory factor, so long-term investors should not put too much weight on these kinds of considerations.
While currency headwinds may drag on performance over the coming months, Europe is still a major travel destination, attracting visitors from all over the world, and Priceline's leadership in such a key market is a major plus. Exchange rates come and go, but Priceline's international leadership is a crucial growth driver over decades to come.
Priceline stock is currently trading at a forward P/E ratio near 19, moderately above the average forward P/E ratio for companies in the S&P 500 Index, in the neighborhood of 17.6, based on data from Morningstar.
Even in the face of challenging economic conditions, Priceline will most likely generate growth rates substantially above average, both in the coming quarter and over the long term. If that weren't enough, Priceline's profitability levels are certainly superior to most companies in the S&P 500 Index. Keeping these considerations in mind, Priceline merits a premium valuation when compared to other companies in the S&P 500.
In a nutshell, transitory weakness because of macroeconomic factors is hurting Priceline in the short term, but the long-term growth story is still as healthy as ever. Chances are, the recent pullback in Priceline stock will turn out to be a buying opportunity for investors.
