Cliff Asness Has Been Buying Up Kayak

A 13G filed with the SEC has disclosed that AQR Capital Management- a hedge fund managed by Cliff Asness- owns about 590,000 shares of Kayak Software Corp (NASDAQ:KYAK). This gives it nearly 13% of the total shares outstanding. Our analysis of AQR’s 13F filing for the third quarter of 2012 shows that it did not own any shares at the end of September (see Cliff Asness’s stock picks), so all of these shares in Kayak were acquired in the last three months or so.

AQR CAPITAL MANAGEMENT

Kayak Software Corp is currently in the process of being acquired by Priceline.com Inc (NASDAQ:PCLN) with a target price of $40 per share; the stock price went above that level earlier in January and the current price is about $40.50. AQR had bought most if not all of their shares before this occurred. Part of the deal is in stock, and so Kayak shareholders would receive shares in Priceline after it closes; in addition, there is likely some speculation that Priceline will have to increase its bid (though the initial offer was 29% over the previous closing price). Many hedge funds like to invest in merger arbitrage because the returns depend on whether or not the deal closes rather than market conditions (read more about merger arbitrage strategies). The deal was recently approved by regulators, and is expected to close in the first quarter of 2013.

Priceline.com Inc is a popular pick among hedge funds (it made our list of the most popular services stocks for the third quarter), most notably Julian Robertson’s Tiger Cubs. The four largest positions by market value recorded in our database of 13F filings all belonged to Tiger Cub funds including billionaire Stephen Mandel’s Lone Pine Capital (check out Mandel’s stock picks) and Tiger Global Management (find Tiger Global’s favorite stocks).

Priceline would be acquiring Kayak Software Corp at a high price in terms of either its earnings or its cash flow. The stock’s trailing P/E multiple is 58, and even though its revenue and earnings have been up Priceline.com Inc would have to realize a good deal of synergies on the transaction in order for it to make sense to buy those earnings (in contrast, the acquirer itself trades at 25 times trailing earnings). Even analyst consensus for 2013- the sell-side likes travel websites- implies a forward P/E of 30, as opposed to Priceline’s 18. In addition, Priceline hasn’t exactly been struggling to grow organically: in the third quarter of 2012, revenue was up 17% and net income was up 27% compared to the same period in 2011. Kayak’s EV/EBITDA multiple is also very high at 26x, though Priceline is expensive as well at 16x.

How do these companies’ earnings multiples compare to others in the industry?

It’s also appropriate to compare these two stocks to Expedia Inc (NASDAQ:EXPE) and Tripadvisor Inc (NASDAQ:TRIP). High growth is priced in to these companies as well, as their respective trailing earnings multiples are 26 and 34. Note that these are significant discounts to Kayak, and in fact are significant discounts to where Kayak was trading before Priceline offered a hefty premium for the company. Revenue has been up strongly at both of these companies; it’s challenging to determine how Expedia’s earnings have changed as it spun out Tripadvisor about a year ago. Chinese tour company Ctrip.com International, Ltd. (NASDAQ:CTRP) is another possible comparable company, though its financial position is a little more uncertain.

We’re not sure that investors have much room to make gains on an investment in Kayak, unless the transaction price goes up (or if there turns out to be some sort of arbitrage opportunity with Priceline shares). While it’s impressive that AQR has taken such a large stake, it looks likely to us that these shares were bought before (or at least mostly before) the stock price crossed $40 and so unless there is a pullback in the price for some reason (or more news emerges) it’s probably not wise to follow Asness here.

Disclosure: I do not own any stocks mentioned in this article.

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