In most cases where investors need to make tough decisions, successful companies delivering strong financial performance and attracting positive coverage from Wall Street usually trade at above-average valuation levels. If you want to buy undervalued stocks, you generally need to look among unloved names, companies going through challenging periods or delivering disappointing financial performance.
However, Priceline (NASDAQ:BKNG) stock looks like a very interesting alternative. The company is firing on all cylinders, and Wall Street analysts have a broadly bullish opinion about its prospects, yet valuation is still very attractive.
Wall Street is in love with Priceline
Priceline has consolidated its leadership position in the tremendously promising online travel industry over the last several years, and it has generated truly spectacular returns for investors in the process: Priceline stock has risen more than 600% through the last five years.
The company has increased sales at an impressive rate of 29.2% annually over the last five years, far outgrowing its main competitor in online travel, Expedia (NASDAQ:EXPE), which delivered an annual growth rate of 10.2% over the same period.
Priceline benefits from a leadership position in international markets, which allows the company to deliver superior growth rates in the industry. While Expedia is doing a sound job at expanding in global markets and accelerating its performance, Priceline remains the undisputed growth leader in the online travel business.
Priceline operates mostly under the agency business model, which means allowing hotels and other service providers to list their own offers, paying the company a commission for every transaction. The company spreads its fixed costs on a rapidly growing revenue base as it expands over time, and this profitable business model produces big fat profit margins in the area of 36% at the operating level.
Considering the company's impressive growth rates and sky-high profitability, it's no wonder why most Wall Street analysts love Priceline. Based on data from Thomson Reuters, the company has three "hold" recommendations from analysts, while 16 analysts rate Priceline as "buy" and seven analysts consider the stock a "strong buy."
Price targets from Wall Street analysts are quite optimistic too. The median target for Priceline stock is $1,500, more than 30% above the current stock price in the neighborhood of $1,140. Even the lowest estimate among the analysts following the stock is 12% higher than current price at $1,275 per share, while the most bullish price target for Priceline stock is $1,600 per share, implying an upside potential of nearly 40%
Valuation is still attractive
In spite of its remarkably strong performance and the broadly positive opinion from Wall Street analysts, Priceline stock is still trading at attractive valuation levels, which could signal a buying opportunity for investors.
Priceline trades at forward price to earnings -- P/E -- ratio of 17.7 times earnings estimates for the next year, roughly in line with stocks in the S&P 500 Index, which carries a forward P/E ratio of 17.5 according to data from Morningstar.
However, Priceline has far better growth prospects than the average stock in the S&P 500 Index. While Wall Street analysts are forecasting an annual earnings growth rate of 10.1% per year for companies in the index over the coming five years, Priceline is expected to grow at more than double that rate, in the neighborhood of 24.8% annually.
The PEG ratio is usually used to evaluate a company's valuation in comparison with its growth potential. The ratio is simply calculated by dividing P/E ratio over the company's expected growth rate, and it provides a simple measure to weight up valuation and growth. A popular rule of thumb is considering that a stock is cheaply valued when the PEG ratio is below 1.
While the average stock in the S&P 500 index is trading at an average PEG ratio of 1.75 based on Morningstar data, Priceline trades at a much cheaper level of 0.73. This valuation level looks quite convenient for a growth leader in a promising industry such as Priceline.
The bottom line
Some investors believe the winners keep on winning, and they gravitate toward high-quality growth companies, even if this means having to pay a valuation premium. On the other hand, value investors prefer to pay more attention to valuation levels, always looking to buy bargain companies for an attractive entry price. Whichever camp you are in, there are strong reasons to consider buying Priceline stock.