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Priceline Falls as Near-Term Growth Concerns Resurface

By Dan Caplinger - May 4, 2016 at 9:08AM

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Some calendar-specific worries hit shares of the online travel specialist hard.

Image source: Priceline.

Online travel specialist Priceline Group (BKNG 1.09%) constantly has to deal with the ups and downs of the travel industry, and changes in the timing of key holidays and events can have a big impact on its quarterly results. Although those impacts tend to even out in the long run, they nevertheless can cause fear among those looking at results in a shorter time frame. Coming into Wednesday's first-quarter financial report, Priceline investors were looking for solid revenue and earnings growth, and the company delivered on that front. Yet the guidance that Priceline gave for its current and future quarters have some fearing that its high past growth rate will inevitably slow. Let's take a closer look at the latest from Priceline Group and what investors should take from its outlook for the future.

Priceline posts a solid quarter
Priceline's first-quarter results were extremely strong, once again showing that the company consistently outperforms the guidance that it sets. Revenue jumped 17% to $2.15 billion, topping the consensus forecast by about $30 million. Growth in adjusted net income was even more impressive, rising by nearly a quarter to $532.5 million and producing adjusted earnings of $10.54 per share. That was $0.88 higher than what most investors were expecting from the online travel company for the quarter.

Fundamentally, Priceline continued to fire on all cylinders during the quarter. Gross travel bookings climbed 21% to $16.7 billion, and that figure was depressed by about five percentage points of downward pressure from foreign currency impacts. The company's international operations saw growth of 23% in gross profit, and that would have been 31% on a constant currency basis without the strength of the U.S. dollar.

Looking more closely at Priceline's target industries, the hotel business once again led the way forward for the company. Room nights booked rose 31% from the year-ago quarter to 136.5 million, accelerating from its pace in the fourth quarter of 2015. Rental car days were up 11% to 16.2 million, reflecting a sluggishness that began last quarter compared to its pace in most of 2014 and 2015. Of greater concern was the fact that airline ticket sales saw their declines accelerate, falling 7% year over year to 1.8 million.

Priceline also continued to get most of its growth from agency revenues, where figures climbed by a quarter to $1.5 billion. Advertising revenue was also strong, growing by more than a fifth, but merchant revenues continued their trend of decreases by posting a 5% decline.

Interim CEO Jeffery Boyd kept his comments simple about the company's performance. "The Priceline Group delivered strong top line growth and attractive margins in the first quarter," Boyd said, and "growth in room night reservations of 31% reflects continued solid execution in the market for global travel."

What's ahead for Priceline?
Moreover, Priceline sees continuing opportunities for better results ahead. In the interim CEO's words, "The Group is looking forward to continued investments in product, service, and branding that will drive long-term growth for our leading brands."

Yet what sent shareholders into a panic was Priceline's guidance for the second quarter. It expects revenue growth of 7% to 14%, which is weaker than the 16% growth rate that most investors are expecting to see this quarter. Similarly, adjusted earnings projections for $11.60 to $12.50 per share are far below the $15-per-share consensus forecast among those following the stock. Even though Priceline routinely beats its own guidance, these figures are far enough below current expectations to create legitimate concerns about whether the travel giant can bridge the gap.

However, there is some good news in the guidance. Priceline expects that currency impacts will disappear in the second quarter, with growth in constant currency and dollar-based metrics being identical. That will be a nice change from the prolonged hit to Priceline's results from the currency markets, and it could prompt faster earnings growth in the future.

Priceline stock fell sharply because of the concerns over the guidance, falling about 10% in the first half-hour of regular-session trading following the announcement. In order to duplicate its past success, Priceline will need to make up a lot of ground and surpass its guidance convincingly in order to prove the durability of its long-range growth trajectory.

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