Is priceline.com Destined for Greatness?

Every investor can appreciate a stock that consistently beats the Street without getting ahead of its fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with improving financial metrics that support strong price growth. Let's take a look at what priceline.com's (BKNG 2.05%) recent results tell us about its potential for future gains.

What the numbers tell you
The graphs you're about to see tell Priceline's story, and we'll be grading the quality of that story in several ways.

Growth is important on both top and bottom lines, and an improving profit margin is a great sign that a company's become more efficient over time. Since profits may not always grow at a steady rate, we'll also look at how much Priceline's free cash flow has grown in comparison to its net income.

A company that generates more earnings per share over time, regardless of the number of shares outstanding, is heading in the right direction. If Priceline's share price has kept pace with its earnings growth, that's another good sign that its stock can move higher.

Is Priceline managing its resources well? A company's return on equity should be improving, and its debt-to-equity ratio declining, if it's to earn our approval.

By the numbers
Now, let's take a look at Priceline's key statistics:

PCLN Total Return Price data by YCharts

Source: YCharts. * Period begins at end of Q3 2009.

PCLN Return on Equity data by YCharts

Source: YCharts. * Period begins at end of Q3 2009.

How we got here and where we're going
Although Priceline's had impressive growth over the past three years, and has managed the rare feat of pushing its free cash flow to a higher growth rate than its net income, it still falls short on several important metrics. The company's stock price has outpaced its earnings per share, thanks to a declining level of profitability. Priceline's debt has also shot up in recent years, although there appears to be some effort made to pay it down. What will it take for Priceline to earn more than an inadequate three of seven possible passing grades?

Priceline's recent acquisition of Kayak (NASDAQ: KYAK) won't help drop that debt, but Priceline avoided raising more to complete the purchase. At worst, it simply pushes out the repayment horizon a bit further. At best, it introduces exciting new synergies, with Kayak's big-data capabilities offering Priceline customers the accuracy and efficiency they won't get from old-school travel sites like Orbitz Worldwide (NYSE: OWW) and Expedia (EXPE 2.61%), both of which have fallen far behind Priceline already in terms of bottom-line growth over the last few years.

On the other hand, my Foolish colleague John Del Vecchio notes that Priceline is overpriced at its current level, despite impressive year-over-year gains on both top and bottom lines. A 23 P/E isn't bargain-basement territory, but Expedia is right alongside Priceline, despite less earnings growth, and TripAdvisor (TRIP 2.19%) is even costlier, despite a lower-than-anticipated growth rate for the upcoming year.

Priceline's not earning a premium over its peers despite trouncing them all and, in many cases, an industry leader does deserve a P/E that's ahead of the pack. Priceline didn't become one of this decade's best stocks by looking overpriced -- it simply continues to outperform the rest of the industry.

Beyond Kayak, Priceline's also expanding into rental cars with its acquisition of RentalCars.com, which is already posting solid growth for its new parent. Creating a convenient car-rental portal pushes Priceline's expansion plans up against short-term renter Zipcar (ZIP.DL2), but Priceline avoids the heavy expenses of actually managing a rental fleet, leaving that to its partners. Priceline's steady expansionism has built it into the largest travel portal on the market. With this sort of size, Priceline should be able to keep pushing forward as other sites struggle and, perhaps next year, we'll see some positive momentum on some of these failing grades.

Putting the pieces together
Today, Priceline has many of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.