Is Priceline A Buy After Earnings?

Priceline.com Inc (NASDAQ:PCLN) soared 10% in after hours trading on November 1st as the travel bookings website reported a very strong third quarter that beat analyst expectations. Bookings were 25% higher than in the third quarter of 2011 even after a negative currency impact, and revenue was up 17%. Net income was 27% higher. Priceline had been seeing strong growth prior to this quarterly report; for example, both revenue and earnings had been 20% higher in the second quarter of 2012 than a year earlier. As such its growth rate appears to not be slowing down much, a trend which had been somewhat priced in to the stock. Priceline is now up about 34% year to date, though it is still well below its highs from the spring.

LONE PINE CAPITAL

Priceline.com Inc has a trailing P/E multiple in the 20s following its higher earnings and increase in price. Large, continuously growing companies often trade higher than that; alternatively, consider Priceline’s forward P/E of 18 and its five-year PEG ratio of 0.9. These figures indicate that analyst expectations are for continued strong growth over the next several years that- if the consensus is correct- would make the stock undervalued at current prices. Of course, the sell-side may be being a bit optimistic in terms of how well Priceline can sustain its growth rate, but the latest quarterly report shows very little sign of a slowdown and so we think that it could be a good value.

According to our database of 13F filings, the three largest hedge fund positions in Priceline.com Inc at the end of June were all held by Tiger Cub funds. Billionaire Stephen Mandel’s Lone Pine Capital reported a position of 1.1 million shares, which was worth about $750 million in market value at that time (find more stocks owned by Lone Pine Capital). Tiger Global Management owned about 870,000 shares, and Andreas Halvorsen’s Viking Global increased its stake by 69% over the course of the quarter; that fund closed June with 1.1 million shares in its portfolio. See more stock picks from Tiger Global Management and from Viking Global. Together, these three funds had over $2 billion invested in Priceline.

Priceline’s closest peers are Expedia Inc (NASDAQ:EXPE) and Kayak Software Corp (NASDAQ:KYAK). Expedia is priced at about the same level as the larger Priceline: 24 times trailing earnings following its own third quarter (net income was down 18% from a year earlier, but this was due to the spinout of Tripadvisor; income from continuing operations was about flat) and 16 times forward estimates. We like Priceline better than Expedia, due to its superior recent performance (though it is difficult to tease out the full impact of the spinout) and to its larger size. Kayak has been much more of a growth company: in the second quarter of 2012, its earnings nearly doubled from a year earlier. As one might expect, its multiples are considerably higher than these other two travel websites, and for example it trades at a forward P/E of 34. We don’t think that it deserves that much of a premium to the more established companies.

Priceline can also be compared to Chinese tour company Ctrip.com International, Ltd.  (NASDAQ:CTRP) and Tripadvisor Inc (NASDAQ:TRIP). Ctrip’s earnings were down in its most recent quarter, and with both trailing and forward multiples in the 20s it trades at a premium to Expedia and Priceline. Even with the Chinese exposure- which may not even be a plus anymore- we don’t think that is a good price. Tripadvisor trades at 20 times forward estimates. Trailing earnings and growth rates are a bit more difficult to its spinout status, and while the company appears to be increasing its revenue the numbers for net income don’t look as good. It is also heavily shorted: 18% of the outstanding shares were held short as of the most recent data. We’d avoid it.

Even after the pop in the stock, we think that Priceline is the best stock to buy in the travel industry. Its earnings multiples are about in line with its peers (or even lower, particularly on a forward basis) yet it continues to grow nicely.

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