The Future Looks Bright for Online Travel and Priceline.com (Nasdaq: PCLN)

by Jason Jenkins, Investment U Research
Thursday, March 7, 2013

There’s a thriving industry out there you’re quite aware of – but probably not aware of. Let me explain that statement.

The online travel market is growing by leaps and bounds, and is nowhere near saturated.

You are inundated with all the commercials on television. They’ve even given William Shatner another life as a “Vacation Spy” at the age of 81. But how many of us have looked at the online travel industry as an investment opportunity? Well, you should, and Shatner’s “Priceline Negotiator” persona is a perfect place to start. Priceline.com (Nasdaq: PCLN) is doing everything in its power to strengthen itself in this thriving industry.

What the Q4 Earnings Showed Us

On February 26, Priceline announced it had beat estimates for the fourth quarter 2012 estimates. Net income rose to $288.7 million, which is $5.63 per share. For 2011, that number was $225.7 million, or $4.41 per share. Earnings jumped to $6.77 per share from $5.37 a share a year earlier. Analysts forecasted $6.54 per share. Revenue increased 20% to $1.19 billion from the previous year.

Priceline believes travel bookings and gross profit will both increase in the range of 30% to 37% in the first quarter of this year. CEO Jeffery Boyd stated in a press release:

“The group’s brands are off to a good start in 2013, with greater supply and geographic reach. While global economic conditions remain a concern, we are excited about our long-term outlook.”

As you may have been thinking, all these same European and global issues were happening in 2012, but they seemed not to affect Priceline. Well, the industry and Priceline thrived, because people did not stop travelling. Travelers just decided to travel cheaper.

Future Drivers

The online travel industry will be driven by two major growth trends over the next few years. The first is the rise in international travel. Boyd told CNBC that Priceline will invest in Asia and Latin America to take advantage of the growth opportunities in those parts of the world.

He went on to say the majority of Priceline’s business is abroad, and the numbers show it. Their third quarter indicated a great deal of their gross bookings coming from Europe. They started to see some stability in that region.

The other major driving force is the increase in online travel advertising. Priceline attempted to take advantage of this trend by purchasing Kayak.com for $1.8 billion. Boyd believes buying Kayak gives Priceline access to a great resource of mobile technology.

Also, another goal was for Priceline to try to diversify beyond the traditional online travel bookings model by gaining access to online travel ad spending. Kayak.com is the biggest player in this model. On the other hand, Priceline will help Kayak’s business internationally, because Priceline is already a global player.

Many analysts give Priceline a price target of about $800. The target is based on forecasted earnings growth above 20% for the next few years. In three years, with that type of growth, you should be looking at an EPS of $50.

Increased Spending and Lower Margins Should Equal Long-Term Growth

Recently, some investors may have turned away from, or been turned off by, Priceline’s increased spending and possible lower margins. A few weeks ago, the company forecasted lower margins for the first quarter of 2013, and Priceline didn’t give any guidance for the long term. But keep in mind, the online travel provider has never given long-term guidance. Usually, information is given quarterly.

But I believe, as Mr. Boyd stated, “Investors will appreciate the trade-off between growth and profitability if the company can deliver on that promised growth.”

It looks like they should deliver.

Good Investing,

Jason

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