Is It Finally Time To Buy Shares Of Priceline (PCLN) Again?

Priceline.com (NASDAQ:PCLN) is one of the leading online travel companies in the world referred to as OTA. There are however many other players here, including Expedia (NASDAQ:EXPE) , TripAdvisor (NASDAQ:TRIP) , MakeMyTrip, Ctrip (NASDAQ:CTRP) , Qunar and Airbnb.

Despite billions of dollars in sales, Priceline’s share is just a fraction of the global online travel booking market. The rest of the market is highly fragmented with many other smaller players as well as offline operators. So both the transition from offline to online booking and the acquisition/elimination of smaller players presents good growth opportunities for Priceline.

Now the question is, why are we positive about Priceline, which has a Zacks Rank #2 (Buy) despite the horrifying reaction of investors after the company reported its first-quarter results?

Why was Priceline Stock Punished Post Q1 Numbers?

Priceline has been consistently beating estimates quarter after quarter. In the first quarter, both revenues and earnings exceeded the Zacks Consensus Estimate. Agency and merchant businesses showed solid momentum, room nights grew much faster than in recent history, and rental cars were also strong.

But investors moved straight on to the guidance, which was conservative as usual. For the second quarter, Priceline guided room night bookings growth of 15–22% and total gross bookings growth of 11–18% year over year (11–18% on a constant currency basis). This is expected to yield a year-over-year revenue increase of 7–14% ($2.52 billion at the mid-point), below the $2.69 billion that analysts were expecting.

Also, pro forma EPS is expected to come in at $11.60–$12.50, well below the Zacks Consensus Estimate of $14.12.

It is this propensity for conservative guidance that punished the stock last quarter and in the quarter before that.

Priceline’s Positive Earnings History Gets Upper Hand

However, the company topped estimates in each of the last four quarters at an average rate of 4.73%. Not just that, the company hasn’t missed estimates in any quarter since 2012, which is a very big deal.

Also, the company has received one positive estimate revision for the upcoming quarter and the current year over the last 30 days. The company saw no negative estimate revision in the last one month.

The Zacks Consensus Estimate climbed 0.5% in the last 30 days to its current level of $11.54 a share for the upcoming quarterly results. For 2016, the Zacks Consensus Estimate climbed 0.7% to its current level of $63.26 over the same period.

Online Travel Industry Looks Attractive

The U.S. Commerce Department estimates that international travel to the U.S. will grow at a CAGR of 3.1% from 2015 to 2020. Visitor volume is expected to grow from 0.4% in 2015 to 2.6% this year. Inbound travel volumes from Mexico, China, Canada and the U.K. will be the highest during this period. Moreover, market research data indicates that prices are rising across the world, with the biggest increases in Central/South America and the Middle East/Africa. Since Priceline is a major international player, these trends play into its sweet spot.

Strong Demand, Sturdy Margins

Priceline is seeing robust demand and is not expecting any currency impact in the upcoming quarter. Also, its gross margins are rising. The company’s margins have moved from 78% to 93% in the last three years.

The primary reason for this is Priceline’s mix of agency business (50% to 71% of total revenue in the last three years). Under the agency business model, a company doesn’t need to maintain inventory and therefore doesn’t have to manage related costs, with a corresponding positive impact on gross margin.

International Expansion Strategy

Priceline has been making all efforts to strengthen its position in the domestic market and expand internationally. It generates a larger chunk of revenues internationally, unlike its rival Expedia. It is not only increasing its hotel inventories, but is also entering into strategic alliances and making acquisitions that could drive growth in the future and add to its top-line growth.

Priceline is also investing in building its brand in the domestic market and its spending has so far been commensurate with revenues. Therefore there is not much of a cost burden on the company.

Bottom Line

Priceline belongs in an attractive industry and has a strong international presence, which is particularly positive for its business although it means that foreign exchange is always a crucial factor. However, Brexit remains a concern for Priceline as uncertainty in Europe still looms. Given its solid Zacks Rank and solid history of positive surprises, we recommend the stock at this point.

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