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Priceline's Growth Is Far From Dead

By Nicholas Rossolillo - May 20, 2016 at 8:48AM

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Future growth has been guided lower, but investors shouldn't get too worried about it.

After an incredible 10-year run that saw its stock double several times over, Priceline Group (NASDAQ: PCLN) has had much more modest returns the past two years. The reason? Investors have been mulling over prospects of the slowing business growth forecast by management, and digesting the recent and sudden change at the CEO position. Despite another strong showing in the top and bottom line in the first quarter of 2016, should investors be concerned with the online travel site's future growth prospects?

PCLN Chart

PCLN data by YCharts

The quarter in review

The Priceline Group posted double-digit growth in total revenue and net income. Booking revenue was up significantly over the previous year, offsetting weakness in other areas such as merchant revenues. Assets also saw a nice increase, as the company bolstered its short-term cash and investments. Liabilities increased, too, although this was primarily due to an increase in accrued short-term expense over the prior year.

First Quarter 2016

Result

% Increase Over Last Year

Revenue

$2.15 billion

16.8%

Net income

$374.4 million

12.3%

Operating expense

$1.47 billion

18.5%

Total assets

$18.3 billion

5.2%

Total liabilities

$9.3 billion

7.5%

Chart data source: Priceline Group's first quarter 2016 earnings results.

Even though the numbers were very healthy, the biggest concerns surrounded the increase in operating expense and the abrupt departure of former CEO Darren Huston on April 28. Regarding the sharp increase in expenses, the company cited increased competition for priceline.com because of hotel cost-cutting. To offset some of the weakness seen in this segment, advertising and information technology expenses saw an increase. However, the majority of the expense increase was due to compensation to personnel, and the company sees expenses going down through the year as the company geared up in the first quarter for peak travel season.

Regarding the questions at the CEO position, investors were surprised to see the abrupt departure of Huston at the end of April regarding a violation of the company's internal code of conduct. An ongoing search is being conducted to replace him, but I expect a seamless transition that won't affect the business. Jeffrey Boyd, current chairman and CEO from 2002 to 2013, has stepped in to fill the void. Gillian Tans, a longtime member of Priceline subsidiary booking.com's leadership team, has taken over that CEO position, which Huston had also filled. While the company conducts its search, current tenured leadership should keep things moving forward.

William Shattner in Priceline Group's advertising campaign. Image source: priceline.com.

Has growth dried up?

For the second quarter of 2016, Priceline management projected year-over-year revenue growth of 7% to 14% and expected adjusted earnings to be flat or down as much as 8%. Total growth in bookings is expected to decelerate the rest of the year. To be fair, the company beat its own expectations for the first quarter, but assuming expectations this go-around are correct, should investors be worried that the growth in the company is dying? I think there are a couple of things going for the Priceline Group that should put concerns to rest.

  • The company is well diversified within the travel industry. Vacation bookings are derived both in the U.S. and abroad, and nearly 90% of those came from outside the U.S. last year.One of the strongest growth segments for Priceline is its subsidiary Agoda, which specializes in international travel. That strong international presence looks poised to continue growing for the company.

    Priceline is also diversified in its service offerings. While the company makes sales off bookings of hotels, flights, rental cars, and other travel amenities, it's been adding depth to that mix. Its website kayak.com, which helps users search the Web and compare travel prices, earns revenue from advertisers and other travel sites that post deals on kayak.com. Open Table, which offers reservation software services for restaurants, also adds a new stream to the mix.

    Booking.com continues to grow as well, operating as a travel agent and earning a commission off the sale of travel amenities. This compares with the merchant travel model, where a travel company will purchase a block of hotel room reservations, mark them up, and sell them to travelers. This model, which priceline.com primarily offers, has been under pressure by cost-cutting in the industry. The agent model, which booking.com offers, has helped drive business results higher.
  • The Priceline Group continues to push technology in the travel industry. Booking.com is especially a key driver in the push to bring all sorts of travel accommodations to the Internet. The company is in tune with changes in travel preferences and now boasts more than 900,000 properties in over 220 countries, according to Boyd. These accommodations include not just hotels but also homes and apartments. Priceline is also exploring avenues for cross-promotion across its different platforms, combining ways for users to book everything from a place to sleep to finding flights, renting cars, and making restaurant reservations. Its agency model also allows for the company to increase offerings to travelers, as travel accommodation owners are able to list on Priceline's various websites, rather than having Priceline purchase and list the offerings.
  • A strong balance sheet and cash flow afford the opportunity to grow. In 2015, Priceline shelled out around $75 million to acquire Rocket Miles, Price Match, and AS Digital. The moves added depth to existing services in travel booking and restaurant reservations, but the Price Match acquisition added a new service that helps hotels manage sales and marketing. For 2016, Boyd said Priceline's business is wide and deep and gave no indication of future acquisitions,but the more than $3 billion in cash and short-term assets on the books certainly gives the company the ability to do so if it sees opportunity. Internal development of growth is also possible, and the nearly $400 million in net income affords the company room to increase its last stated IT budget of almost $33 billion even further, if it sees growth potential.

While worry over Priceline's own forecasted slowing growth may be concerning, the travel industry can be very volatile and seasonal. It's important to look at the strong track record of growth the company has posted over the years and compare that against its current pipeline of expansion opportunities. Well positioned within the travel industry and with a growing wheelhouse of services to make travel more accessible, this company can be assured that the worry over faltering growth is just noise.

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