Priceline: A Rare Value

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Mar 10, 2015

Priceline Group (PCLN) is currently a selection of GuruFocus’ Undervalued Predictable Companies Screener. It’s interesting to see a company that ranks so highly on financial strength, profitability and growth metrics possibly become undervalued.

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Over the past 12 months, PCLN has lagged the market by ~20%. In the past 10 years, PCLN has lagged the market in only one other year.

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While earnings growth has slowed, EPS is still growing at 20%+ annually with FCF encouragingly keeping pace. FCF per share has actually outpaced EPS since 2008, an indication that management is able to convert earnings into real distributable cash for shareholders.

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Even so, GuruFocus’ Reverse DCF tool estimates that investors are currently pricing in ~19% of annual EPS growth going forward, lower than the company’s 1-, 5- and 10-year averages. Does this signal a buying opportunity for the long-term investor?

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The business:

The Priceline Group is a provider of online travel and related services in over 200 countries. Priceline owns Priceline.com, Booking.com (the largest online travel agency outside the US), Agoda.com (which caters to the Asian market) and Kayak.com. It also partners with CTrip for the Chinese market and acquired Opentable.com in 2014, gaining a strong foothold in the online dining reservation market.

Despite the rapid proliferation of online travel booking tools, the market remains incredibly fragmented. In 2014, approximately $1.1 trillion was spent worldwide on travel. Priceline booked $50b of that (<5%), with Expedia and Orbitz coming in at $50b and $12b respectively.

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Still plenty of growth opportunities left:

Mature markets such as the U.S. and Europe have online travel penetration of more than 45%. However, faster growing markets such as APAC have penetration rates of <30% (source). Despite this low penetration, the online travel market in the APAC region is expected to total $127b in 2015 (~2.5x PCLN’s total revenues).

Ample growth opportunities and a fragmented market have allowed online travel companies to consolidate the market at a quickening pace. Priceline and Expedia have collectively spent more than $7.6b on acquisitions over the last two years, with Priceline at $4.4 billion and Expedia at $3.2b.

PCLN bought Kayak.com in 2013, which contributed $410m in revenues in 2014 growing at 140%. In 2014, PCLN bought OpenTable.com for $2.6b. OpenTable.com (with estimated revenues of $280m in 2014) has more than 50% of the U.S. online dining reservation market, and is expected to grow at 35% each year for the next three years.

Last year, PCLN also acquired Qlika, Buuteeq and Hotel Ninjas (providers of digital marketing services to hotels). Expedia (EXPE) added European car-rental reservation company Auto Escape and Australian Wotif Group. This year, Expedia has already agreed to buy another two travel booking brands, Travelocity and Orbitz (OWW).

Conclusion:

For 2015, the company announced a $3b share repurchase authorization (5% of total market cap). Trading at a forward PE just ~20x earnings and at a PEG around 1 in an overall expensive market, the stock looks like a bargain at its current price.

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Despite an established track record of higher returns and operating margins, PCLN currently trades at a discount to its closest peer Expedia. Ultimately, PCLN looks attractively priced versus the market, its closest competitor, and on a historical basis.

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