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Priceline.com Inc (PCLN): How to Play the Online Travel Business

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Priceline.com IncPriceline.com (NASDAQ:PCLN)’s  stock continues to defy gravity and stay near the $800 level. Many skeptics have been asking how the stock can be this high with shares having risen 3,000% in the past eight years. The answer is that the company is the best in the online travel space. Priceline.com (NASDAQ:PCLN) has successfully moved from being primarily a “Name Your Price” website to a fully integrated online travel booking destination. With Priceline, you can book flights, hotels, car rentals, vacation packages, and cruise trips. Here are a few of the reasons why I like Priceline:

1). Priceline gets 68% of its revenue from the international market.
2). Priceline just completed the acquisition of Kayak.com.
3). The stock is still cheap with a forward P/E of 17 and a 34% operating margin.
4). Priceline has $103 per share in cash.
5). The stock is trading above both the 50 and 200-day moving averages.
6). Booking.com is the number-one online site for European hotels.
7). The company continues to take market share from Expedia Inc (NASDAQ:EXPE) and Orbitz Worldwide, Inc. (NYSE:OWW)
8). Priceline is using pricing power to negotiate hotel rates for customers.
9). Subsidiary traveljigsaw and rentalcars.com have strong growth in the rental car market.
10). Priceline has beat earnings estimates for 12 straight quarters.
11). The stock has a PEG ratio of 1.

Kayak acquisition

Kayak is seen as an important acquisition for Priceline.com (NASDAQ:PCLN). Kayak is a popular metasearch engine. Kayak allows users to send requests to other search engines and databases to get a single list of results. The move has sent competitor Expedia Inc (NASDAQ:EXPE) scrambling to acquire 63% of German metasearch travel site Trivago.

Expedia is paying 7.6 times Trivago’s 2012 revenue, whereas Priceline.com (NASDAQ:PCLN) only paid 6.1 times Kayak’s 2012 revenue. There are only a few metasearch sites in the travel space and Kayak is by far the most popular, so Priceline got a great deal compared to what Expedia is having to pay.

Expedia generates nearly 45% of revenue internationally; however, its international business did fall 2.2% sequentially last quarter, and revenue per night dropped 3%. There also appears to be other headwinds, where Asia saw low average daily rates (ADRs) and low revenue per room. ADR was also lower in Europe on a year-over-year basis. Jana Partners is one of Expedia’s top hedge fund owners by shares (check out Jana’s portfolio).

International growth

Priceline.com (NASDAQ:PCLN) dominates the international online travel market with its booking.com and agoda.com. Many skeptics were worried that the European crisis would affect Priceline’s bottom line, but that hasn’t happened. Bookings in Europe have been rather consistent, and considering that only 25% of the European hotel market is online there’s plenty of room for growth. Priceline has less than 10% of total hotel bookings in Europe. There’s considerable room for growth in Europe, and people are still traveling to Europe and making hotel reservations.

Besides penetrating the European hotel market further, the fastest growth for Priceline is in Asia, the Middle East and Latin America. These countries have a burgeoning middle class that wants to travel. Among the online travel sites, Priceline is best positioned in the growing $600 billion international travel market.

U.S. expansion

Priceline is looking to strengthen its presence in the U.S. market. Priceline is going to be rolling out an advertising blitz to increase the presence of its booking.com in the U.S. This will lower margins slightly in the next few quarters, but will increase the sites presence in the large U.S. market and deliver top-line growth down the road. The company also just announced strategic relationships with United Airlines and MapQuest, a subsidiary of AOL, Inc. (NYSE:AOL).

The hedge fund trade

Priceline remains a top pick at several hedge funds. At the end of 1Q, there were 67 hedge funds long the stock. Billionaire Steve Mandel’s Lone Pine Capital is the company’s largest hedge fund owner with a $1.2 billion holding that makes up 6.3% of his 13F portfolio (check out Mandel’s top picks). The stock has also been popular among Julian Robertson’s Tiger Cubs with Chase Coleman’s Tiger Global having the largest stake in Priceline among them.

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