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.
Competitors
Priceline’s two main publicly traded competitors are Expedia and Orbitz Worldwide, Inc. (NYSE:OWW). Here is how they compare:
| Priceline | Expedia | Orbitz | |
| Market cap | $39.95B | $7.79B | $804M |
| Revenue | $5.52B | $4.23B | $791M |
| Quarterly revenue growth | 26% | 24% | 7% |
| EBITDA | $1.98B | $640M | $106M |
| Net income | $1.48B | %177M | -$149M |
| P/E | 27.6 | 44.9 | N/A |
Although Orbitz has an incalculable P/E, it could still be a bit expensive after a nearly 200% run up in its stock price year-to-date. Yet, there appears to be no material developments that would warrant such a move. The positive 4Q results support some of the upward move in the stock, where revenue was up 7% year-over-year on higher hotel volume; however, I don’t feel it supports the full 200% run up in the stock.
Hotel net revenue accounts for some 40% of Orbitz’s revenue, and so any ripple in a rebounding economy could put a strain on the company’s top line. This is especially true considering that Orbitz’s airline revenue booking revenue remains weak. What’s more is that over the past five years, Orbitz has traded at an average 280% premium to the S&P 500 P/E, but its current P/E is incalculable. Gotham Asset Management, one of Orbitz’s top hedge fund owners by shares, sold off 16% of its shares last quarter (see Gotham’s portfolio).
Assessment
As you can see from the table, Priceline is the better bet. It has the largest market cap, fastest quarterly revenue growth, highest operating margins, highest profits, and the lowest P/E. Based on these metrics, Priceline is the stock to own of the three.
Priceline is making the right moves for the long-run. The company already dominates the international travel market and that is where the fastest growth is. Neither Expedia nor Orbitz have made the inroads in the international market like Priceline.
Expedia and Orbitz need to be more concerned now that Priceline is turning its attention back to the U.S. market. As Priceline rolls out booking.com in the U.S., that will take further business away from Exedia and Orbitz. Even at $800 a share, Priceline still has room to grow in its markets.
The article How to Play the Online Travel Business originally appeared on Fool.com and is written by Marshall Hargrave.
Marshall 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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