Image source: Priceline.com.
Shares of Priceline (PCLN 2.27%) are down nearly 30% from their all-time high. The stock now trades at 22-times trailing earnings and 15-times forward earnings -- a reasonable price to pay for a leading global travel company in my book. Ultimately, I found this valuation too attractive to pass up and recently bought Priceline's stock for $1,093.
My reasoning was simple: The rise of the U.S. dollar is masking the underlying strength and earnings power of Priceline's global travel business, which has a long runway for growth.
King Dollar's reign
Priceline conducts about 90% of its business outside the U.S., where it deals in local currencies. In periods when the dollar is strong, other currencies become weaker and translate to fewer dollars. Throughout 2015, the continued rise of the U.S. dollar has had a significant impact on Priceline's reported earnings.
Most recently, Priceline's third-quarter gross travel bookings, which accounts for all travel services purchased by its customers, increased by 7% year over year to $14.8 billion. Had the dollar remained constant between the third quarter of 2014 and 2015, gross travel bookings would've increased by 22%. That's not all:
- Gross profits would've increased by 29%, instead of the 12% reported.
- International gross profits, which represented 90% of its total gross profit, would've increased 29%, instead of the 11% reported.
Because the vast majority of Priceline's expenses are incurred overseas in local currencies, in a similar proportion to its revenue, the impact of the strong U.S. dollar to margins and the bottom line is comparable to the revenue impact. In other words, had the U.S. dollar remained stable between years, Priceline's third-quarter net earnings would've been much stronger.
A muted outlook
Priceline believes the dollar will continue to drag on growth in the near term. The following table illustrates this impact on fourth-quarter earnings, which disappointed investors and sent the stock lower.
|
Metric |
Annual Growth Excluding Currency Headwinds |
Annual Growth Including Currency Headwinds |
|---|---|---|
|
Total gross bookings |
13% to 20% |
1% to 8% |
|
International gross travel bookings |
17% to 24% |
3% to 10% |
|
Gross profit |
14% to 21% |
3% to 10% |
Source: Priceline.
Generally speaking, when a stock sells off for short-term reasons, it presents a buying opportunity for long-term investors, assuming, of course, the underlying fundamentals of the business remain intact. In Priceline's case, the underlying fundamentals appear to be strengthening.
A self-reinforcing moat
Although the Priceline brand is often associated with its tongue-in-cheek William Shatner "negotiator" ads for Priceline.com, the company's booking accommodation site, Booking.com, is the travel group's main differentiator and competitive advantage. Overall, Booking.com is by far the largest booking accommodation site in the world and drives the majority of Priceline's earnings.
In the third quarter, Booking.com boasted over 820,000 bookable properties, which grew by 38% year over year. The number of hotel room nights stayed during the quarter increased 22% year over year to 115.6 million. By comparison, Expedia (EXPE 1.24%) offered accommodations at over 271,000 properties worldwide at the close of the third quarter, which increased by 29% year over year. Expedia's nights stayed increased 36% annually to 61.5 million in the third quarter.
Essentially, Booking.com's massive size creates a powerful network effect over Expedia and other competitors. After all, more available properties on Booking.com attracts a larger pool of customers, which in turn, attracts even more properties to partner with the site. That's what I call a self-reinforcing moat.
Putting it all together
I bought Priceline's stock because its current currency headwinds and muted outlook masked what was an otherwise solid earnings report showing strong underlying growth in the business, particularly Booking.com, which continues to extend its sizable advantage over the competition. Additionally, the long-term growth prospects of online travel in general remain encouraging, considering about $1.3 trillion in travel bookings are made each year, but only about 40% of all bookings are made online.
And while it's true that currency headwinds may continue to pressure Priceline's earnings for the time being, it likely won't last forever. The U.S. dollar will eventually stabilize or weaken relative to other currencies, which I expect will positively impact Priceline's future earnings.
