Please ensure Javascript is enabled for purposes of website accessibility

Why I Bought Priceline Group Inc. at $1,093

By Steve Heller – Jan 28, 2016 at 10:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Image source: Priceline.com.

Shares of Priceline (BKNG -0.04%) 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 -1.72%) 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.

Steve Heller owns shares of Priceline Group. The Motley Fool owns shares of and recommends 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Expedia, Inc. Stock Quote
Expedia, Inc.
EXPE
$89.69 (-1.72%) $-1.57
Booking Holdings Stock Quote
Booking Holdings
BKNG
$1,669.25 (-0.04%) $0.63

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.