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Priceline Earnings Soar, But Should Investors Worry About the Future?

By Dan Caplinger – May 7, 2015 at 12:00AM

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Despite the company's tradition of giving poor guidance, Priceline shares initially fell after its first-quarter report.

Image: Priceline.

Online travel portal Priceline Group (BKNG -0.01%) has developed almost a tradition of tempering its strong quarterly financial performance with less optimistic assessments of its future potential. Coming into Thursday morning's release of its first-quarter financial report, Priceline's stock has made substantial gains in recent months as investors focused on the company's leadership position in online travel and a strong market. Yet despite the company topping expectations for revenue and earnings yet again, many shareholders worried about Priceline's downbeat guidance for the second quarter. Let's take a closer look at how Priceline did last quarter and why some investors are panicking about the stock.

Priceline keeps flying higher
Priceline's first-quarter results once again far surpassed its own previous guidance. Revenue jumped 12% to $1.84 billion, topping the 4% to 11% growth rate the company had projected last quarter. Adjusted earnings of $8.12 per share represented relatively slow growth compared to the $7.81 per share the company posted in the year-ago quarter, but it came in far above the $7.20 to $7.75 per share that Priceline had forecast. Gross travel bookings climbed 12%, but that largely reflected the strength of the U.S. dollar, with constant currency-based bookings adding 14 percentage points more growth.

Priceline's various segments performed much like they have in the past. The agency side of the business kept growing healthily, with revenue rising 15% on the strength of offerings such as Priceline's site. Yet the merchant side of the business continued to contract, with 6% lower revenue. Just as we saw last quarter, ad sales roughly doubled from year-ago levels, substantially increasing the importance of advertising revenue to the company's overall results.

CEO Darren Huston was generally pleased with the start to the year. Huston noted that growth in hotel-room night and rental-car day metrics has accelerated, and the international side of the business has done well, jumping 29% on a currency-neutral basis during the quarter. grew by 40%, and Huston said in a prepared statement "we will continue to focus relentlessly on execution at all of our brands and earn our customers' loyalty by delivering winning experiences across desktop, tablet and mobile platforms."

Image: Priceline.

Why Priceline traders are nervous (even though they shouldn't be)
Priceline yet again gave a cloudy outlook for the current quarter. Its second-quarter guidance projected targeted revenue growth of 0% to 7%, with similar growth rates in overall gross travel bookings and international gross travel bookings. The company expects huge impacts from the strong dollar, with constant-currency projections generally about 15 percentage points higher than dollar-denominated figures. Adjusted earnings of $10.95 to $11.75 per share would represent as much as a 12% drop from a year ago and would be far below the $13.10 consensus figure among those following the stock.

Despite the gloomy guidance, long-term investors can focus on the Priceline's efforts to bolster its business. The company has already released its OpenTable app for the new Apple Watch, along with plans for another app that will feature details of upcoming trips and hotel deals near the user's particular location. With so many travelers making same-day hotel reservations close to their actual locations, Priceline believes tools that make it easy to find and book rooms at the last minute will appeal to customers and bolster the overall business.

Nevertheless, shareholders sold the stock off following the announcement, with shares dropping almost 3% in the first 90 minutes of pre-market trading. Given the stock's recent gains, some corrective moves aren't entirely unwarranted. In the long run, though, the headwinds that Priceline has faced from a strong dollar will dissipate, and the real question is whether the company can keep dominating its rivals despite their efforts to grow through consolidation. For now, though, Priceline remains on target to grow at a healthy pace and maintain its leadership in the online travel space.

Dan Caplinger owns shares of Apple and Priceline Group. The Motley Fool recommends Apple and Priceline Group. The Motley Fool owns shares of Apple and Priceline Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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