Summer is here, and it’s time to book a trip online for your vacation. For people who have booked a trip or bought tickets online before, then the business model of Priceline.com Inc (NASDAQ:PCLN) can be understood easier. Priceline.com Inc (NASDAQ:PCLN), a leading global online hotel reservation provider, owns and operates several brands, including Booking.com, Priceline.com, Agoda.com, Kayak.com and Rentalcars.com. Booking.com is the no. 1 online hotel reservation website in the world, offering over 295,000 hotels and accommodations.
Continuous strong buyback
Priceline.com is issuing $1 billion of convertible senior notes that are due 2020 with 0.35% interest rate per annum. The conversation price is about $1,315.10, representing around a 63.58% conversion premium based on the closing price of $803.93 on May 31, 2013. Part of the proceeds will be used for share repurchase and the remaining for general corporate purposes. Priceline.com Inc (NASDAQ:PCLN)’s Board of Directors had also authorized the repurchase of up to an additional $1 billion in common stocks, representing near 2.5% of current market cap for Priceline.com Inc (NASDAQ:PCLN). The company has been aggressively buying back stocks since 2010, allowing it to maintain its total outstanding shares at around 50 million without much dilution, as seen from the chart below.
Priceline.com Inc (NASDAQ:PCLN) has also managed to increase its revenue and profit margin year-over-year since 2009. The company’s earnings-per-share increased as well in the same period, as seen from the chart below.
Operating margin compression
Priceline.com Inc (NASDAQ:PCLN) continues to invest in its long-term growth. The management expects operating margin compression in the second quarter due to the company’s global expansion investment. It continues to build brand name awareness effectively by using a mix of offline and online marketing. Despite lower advertising efficiency, the company continues to invest into the mobile end as well which results in steady growth. Although there may be short-term margin pressure, the company continues to look healthy from the long-term perspective with its continuous growth and increasing brand name awareness. With the successful completion of its acquisition of Kayak Software on May 21, 2013, synergies can be created through Kayak’s international business and the company can also leverage Kayak to expand domestically in the United States.
Through Booking.com, the company continues to shift more of its focus into the domestic market, competing directly with Expedia Inc (NASDAQ:EXPE). Similar to Priceline.com, Expedia Inc (NASDAQ:EXPE) also had a solid start for 2013. Expedia is rolling out its Expedia Traveler Preference (ETP) program as expected, with over 25,000 hotels signed up and over half of those live in production. Expedia is taking a smart strategic route to continue its growth. The ETP program will allow Expedia Inc (NASDAQ:EXPE) to compete with the agency-model players while maintaining merchant margins. Expedia is pushing aggressively into Europe while Priceline.com is trying to expanding into the U.S. market.
Another competitor, Orbitz Worldwide, Inc. (NYSE:OWW), is also having a solid start for 2013 with accelerating growth for stayed room nights. The company continues to invest in 3 key areas: mobile, loyalty, and international market. Orbitz Worldwide, Inc. (NYSE:OWW), rolled out its Orbitz.com Rewards Loyalty program in the first quarter and enhanced its HotelClub initiative with expanded support for more currencies and languages to allow it to expand further into the international market.
With continuous buyback financed with convertible notes, Priceline.com Inc (NASDAQ:PCLN) is making a sounding capital allocation decision to leverage its investment-grade credit and to enhance shareholder value. Although there will be short-term operating margin compression due to higher spending to build its brand name and increase customer awareness, the company remains well-positioned globally. By continuing its penetration into the U.S. market, Priceline.com still has more room for upside potential.
The article More Long-term Growth Is Expected for Priceline.com originally appeared on Fool.com and is written by Nick Chiu.
Nick Chiu has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com. Nick is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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