Priceline Is Becoming A Tiger Hotel

The four largest positions in Priceline.com Inc (NASDAQ:PCLN) in our database of 13F filings for the third quarter of 2012 all belonged to “Tiger Cub” hedge funds. These funds are so called because one or more of their managers had previously worked at Julian Robertson’s Tiger Management. Robertson is not only a legendary investor and a billionaire, but it specially noted for being able to instill the tools for success in investing in many of his protégés. Lone Pine Capital- a fund which is managed by billionaire Stephen Mandel- increased its stake in Priceline by 26% between July and September to a total of 1.4 million shares. This gave the fund more than $850 million invested in the stock at the end of the quarter and made it Lone Pine’s largest 13F position (see more of billionaire Stephen Mandel’s favorite stocks). In addition, Robertson himself initiated a position in Priceline during the third quarter- in fact, it was his second largest new holding by market value (find more stocks that Robertson has been buying).

TIGER MANAGEMENT

During the third quarter, Priceline.com Inc reported a 17% increase in revenue compared to the same period in 2011. Much of the growth came from agency revenues, which are where Priceline acts as a broker operating on commission (merchant sales are categorized as those in which Priceline charges customers direcetly). Despite the company’s size and history of growth, margins actually improved and so net income came in 27% higher.

At its current market cap, Priceline.com Inc trades at 24 times trailing earnings, which we think is about right considering its recent growth rate and the fact that the industry does look attractive. Priceline’s pending purchase of Kayak Software Corp (NASDAQ:KYAK) should also give it a stronger position in the market, though the fact that it’s buying Kayak at a high multiple- about 36 times its expected earnings for 2013- makes us concerned that it’s overpaying. Of course, Kayak’s market capitalization is only about 5% of Priceline’s, but it’s still something to note. While the Tiger Cubs tended to have large positions in Priceline, they weren’t alone and the stock made our list of the most popular services stocks among hedge funds (see the full rankings).

Priceline’s closest peer is Expedia Inc (NASDAQ:EXPE). Expedia has also been experiencing moderate growth (its earnings last quarter were down from a year ago, but this is partly due to the spinout of Tripadvisor Inc (NASDAQ:TRIP)). Expedia is significantly smaller than Priceline in terms of market cap but its earnings multiples are very similar- 24 times trailing earnings and 17 times forward earnings estimates. Our guess is that Priceline is a better buy, but we’re not as confident as we would be if the company weren’t buying Kayak- M&A tends to reduce shareholder value.

We can also compare Priceline to Tripadvisor and to Chinese tour company Ctrip.com International, Ltd. (NASDAQ:CTRP). These stocks both have considerable short interest as the market is skeptical of their prospects. While both have seen rising revenues, Tripadvisor’s earnings rose only 9% in the third quarter versus a year earlier (though it’s possible that the situation is complicated by the spinout) and Ctrip actually saw a decline in net income. With neither company trading at a considerable discount to Priceline- Ctrip’s trailing P/E is 21, and we’d be wary of any stock with too much China exposure right now, with Tripadvisor at 29 times trailing earnings- we’d avoid both of these stocks.

Priceline still seems to be the best value in the travel industry, when considering its historical earnings growth and that of its peers. It’s also a clear market leader, and even if the Kayak acquisition doesn’t add much value it will at least further strengthen Priceline’s position there. We’d suggest that investors take a closer look at the company.

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