Shares of Priceline.com Inc (NASDAQ:PCLN) hit a new all-time high last week after the company reported strong first quarter results. But should investors chase the stock at these levels?
Yes. Here are three reasons you should consider adding Priceline.com Inc (NASDAQ:PCLN) to your portfolio.
Priceline.com Inc (NASDAQ:PCLN) is delivering great growth for investors. During the first quarter, the company grew its quarterly top-line revenues 25% year-over-year to $1.3 billion and its bottom-line earnings per share by 25%.
The problem with the U.S. is the market is nearly completely saturated with 60% of travel reservations done online. So Priceline is looking internationally to drive growth.
Europe represents a big growth opportunity for two reasons. First, the market is under penetrated by online travel agencies as only 42% of travel reservations are completed online. Second, the hotel market in Europe is highly fragmented. The U.S. market is dominated by hotel chains that are more likely to offer online bookings through their own websites. In Europe, there’re more independent lodgings, which makes services like Priceline.com Inc (NASDAQ:PCLN) more attractive.
Priceline is well positioned in emerging markets. In 2007, Priceline.com Inc (NASDAQ:PCLN) purchased Bangkok-based Agoda, which gave the company a foothold in Southeast Asia. The company has also bolstered its presence in China through a partnership with Ctrip.com.
Best of breed
How does it stack up to competitors?
Expedia Inc (NASDAQ:EXPE) shares were on fire in 2012 with the stock posting a 95% gain for the year. Investors have been impressed with the company’s efforts to beef up its international presence by purchasing a stake in German-based travel website Trivago for $628 million. The acquisition is expected to give Expedia Inc (NASDAQ:EXPE) exposure to big markets in western and central Europe.
The problem with Expedia Inc (NASDAQ:EXPE) is that it’s still too exposed to the slower growing U.S. market, which accounts for 59% of bookings. The company is growing earnings next year at 18%, and the company is less profitable with a 6.5% operating margin versus 35% for Priceline.
Rival Orbitz Worldwide, Inc. (NYSE:OWW) has posted a monster run with the stock up 100% last year because many analysts left the company for dead. But the last few quarter the company has swung back into profitability posting a $1.34 EPS last quarter. Suddenly people realized the company may have a viable business. But it’s important to remember that Orbitz Worldwide, Inc. (NYSE:OWW) is the third-rate player in the group with the worst numbers.
Priceline is the best of breed player in the online travel agency space due to the company’s excellent execution and greater exposure to faster international markets.
This is where investors may roll their eyes. How can a stock selling at over $750 be cheap? But ignore the price tag and dig into the metrics.
Priceline.com Inc (NASDAQ:PCLN)’s poor stock performance last year has allowed the company’s earnings to catch up with the stock price. Priceline trades at 16 times next year’s earnings which given the company’s 22% EPS growth rate gives the stock a reasonable 0.70 PEG ratio. Of the companies I cover, this is one of the lowest.
Priceline’s valuation starts to look even better when compared to peers. Expedia trades at nearly the same forward earnings multiple at 15 times next year’s earnings but given the stock’s significantly slower 18% EPS growth rate, it looks more expensive on a PEG basis. Given Expedia’s slower growth, that doesn’t make any sense.
Foolish bottom line
Priceline.com Inc (NASDAQ:PCLN) also has a great catalyst in last year’s $1.8 billion acquisition of Kayak Software, which operates a series of travel applications While some are concerned that Priceline overpaid, the acquisition gives Priceline access to an enormous amount of data that will allow the company to improve its search results and increase revenues. This gives the company a competitive advantage against Expedia or Orbtiz.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Priceline.com. The Motley Fool owns shares of Priceline.com.