After reporting fiscal 2016 financial results back in February, Priceline Group‘s (NASDAQ:PCLN) stock began to rise and continued mostly up until first-quarter results were reported on May 9. The stock dropped right after that report, though then began to rise again and now sits near its high around $1,900. Investors seem to have overreacted immediately after the Q1 report and the company and the stock still offer a lot.
What the Q1 report showed
Priceline and its stable of businesses notched yet another quarter of double-digit year-over-year growth in the most recent quarter. Booking travel via the internet is not new, but the world is still transitioning to that model. That switch is obviously the primary tailwind filling the travel group’s sails and propelling the business higher. Here’s an outline gross profit and earnings per share in the first quarter:
|Metric||Q1 2017||Q1 2016||Increase (YOY)|
|Gross profit||$2.33 billion||$2.02 billion||15.3%|
|Earnings per share||$9.11||$7.47||22%|
Those are impressive numbers and they handily beat internal high-end expectations of 14.5% gross profit growth and $7.90 earnings per share. Shares fell anyway right after earnings were reported as Wall Street was expecting a bit more growth, and management’s guidance going forward also fell short of past results.
But fear not, shareholders: There is continued reason for optimism. For the second quarter, the company expects gross profit to rise year over year 14% to 19% and earnings per share to come in at $12.55 to $13.25, an 11% increase at the midpoint of guidance.
Priceline’s business model has plenty of room to run, too. Accommodation booking online was only at 35% in 2015, according to Euromonitor, a market research company. That figure has continued to steadily grow over the years and bodes well for the internet-based travel industry as a whole.
The game plan headed into the busy season
International growth has been a strong point for Priceline, so the company sees no need to change that game plan up. About $2 billion in gross profit came from overseas in the first quarter, a 17% increase over last year, versus $315 million stateside (representing 6% growth).
The company’s Agoda website is in the driver’s seat in the huge and still-growing Asian market. The company is also still working through its $550 million cash purchase of Momondo Group, a Europe-based travel metasearch that aggregates travel deals from other third-party sites. It will come under the oversight of Kayak, Priceline’s own stateside metasearch engine.
The acquisition of Open Table, which caused some heartburn with a $941 million writedown in value last year, also reportedly did well and was said to have beaten the company’s own internal expectations. The restaurant management and reservation-making service is transitioning to new cloud-based software that will support updates and improvements, and it rolled out a new Facebook messaging integration tool.
Time to go shopping
With not much changing in the way of expectations and business plan, the latest dip in Priceline stock looks like a normal swing in price rather than something to worry about. However, the company’s price-to-earnings ratio is steep at nearly 42, and is near the upper end of where it has historically been valued.
Remember though, that price-to-earnings ratio is thrown off from the loss taken last year on Open Table. That loss will continue to be included in trailing-12-month P/E valuations until the third quarter of this year. I think a better way to look at valuation on a company like Priceline is using free cash flow, or money left over after basic operations are paid for. The picture looks a little different for Priceline based on that.
Based on this metric, Priceline is close to its average valuation going back the last decade. If the company continues to execute on its double-digit growth guidance and the world keeps moving to online travel booking, it’s reasonable to think this stock has room to run higher.
– Stock investment