I have been a fan of Priceline.com Inc (NASDAQ:PCLN) for some time now, and truly believe that the company has been a game-changer for the travel business. However, with shares just below their all-time highs and more than 50% higher than they were just a year ago, valuation has become more of a concern. Specifically, is Priceline still worth buying or holding at the current share price, or should investors get out and look elsewhere in the sector?
A bit about Priceline.com
In America, at least, Priceline.com Inc (NASDAQ:PCLN) is best known for William Shatner commercials and their “name your own price” system of selling discounted travel. While the company certainly has had tremendous success in the U.S., it surprises most investors to learn that the vast majority (92%) of Priceline’s operating income comes from its international operations, mainly in Europe, where their booking.com subsidiary has made the company a leader in online hotel reservations.
Despite its success, Priceline.com Inc (NASDAQ:PCLN) still has plenty of room to grow. The company has stated its intention to focus more effort on expanding its Asian business, where it hopes to duplicate the success it has experienced in Europe. If Priceline can, in Asia, capture even half of its European revenues, it could mean an additional $2.5 billion in annual revenue. A quick calculation of the company’s earnings per share and total revenue indicates that Priceline’s profit margin was just over 27% in 2012, so this would mean an extra $680 million or so in profit.
The company has also grown itself through several acquisitions. Most recently, Priceline.com Inc (NASDAQ:PCLN) acquired online travel search giant Kayak.com in May for $1.8 billion, which should help grow their business both domestically and internationally. On the Asian frontier, Priceline has acquired several travel companies, starting with Agoda in 2007, and more recently with the acquisition of Ctrip in mid-2012.
Too expensive or still a good buy?
When it comes to valuation, I have nothing but positive things to say about Priceline.com Inc (NASDAQ:PCLN). Shares currently trade for 23.1 times this year’s projected earnings of $38.89 per share, which sounds a bit expensive at first. However, Priceline’s record of earnings growth is tough to match, and there is every indication that this trend will continue going forward. In fact, Priceline has done so well that during the peak recession years of 2008-2010, the company’s profits increased by more than 160%! Put another way, not only did Priceline never lose money during the worst financial crisis since the Great Depression, but the company grew at an even faster pace than it had before the recession. How many other growth companies can claim that?
The consensus calls for Priceline.com Inc (NASDAQ:PCLN) to grow its earnings to $46.93 and $56.37 per share in 2014 and 2015, respectively, which translates to annual earnings growth of 21% and 20%, which more than justifies the P/E ratio. In addition, the company has over $4.2 billion in net cash (cash minus debt) on its balance sheet, and just authorized a $1 billion share repurchase. These numbers all sound pretty great, but let’s take a look at our alternatives before jumping in.
Other options: Expedia and Orbitz
Unlike Priceline.com Inc (NASDAQ:PCLN), Expedia Inc (NASDAQ:EXPE)’s shares have fallen off of a cliff after missing the market’s estimates when they reported on July 25. The company’s net income shrunk by 32% compared to last year’s, and the EPS of $0.64 per share, widely missing the consensus of $0.79. I personally don’t like Expedia as an investment, and I think that the spinoff of TripAdvisor negatively affected Expedia’s competitive edge, and it now desperately needs to innovate to stay competitive. If Expedia’s increased R&D efforts begin to bear fruit, this could be an interesting value play, but for now investors would do better to look elsewhere.
Orbitz Worldwide, Inc. (NYSE:OWW) is by far the smallest of these three companies, with a market cap of less than $1 billion. Like the other two, Orbitz operates a travel site both in the U.S. and abroad, but I don’t think the company’s numbers warrant an investment right now. For example, taking a quick look at Orbitz’s revenues reveals stagnant growth for the past eight years. The company also has a pretty large debt load for its size and is trading at an inflated valuation, which I believe is more of a product of the overall market than it is of Orbitz’s success.