Welcome to a new stock analysis from DividendDeveloper! My goal in analyzing stocks on this blog is twofold. First, I want to check if a given stock meets my criteria for investing, and if it would make a good investment. Second, I want to expose my readers to companies that they may not have encountered before, whether because the company’s dividend yield is too low, their streak of increasing dividends is not long enough, or it just slipped through the cracks of their screeners.
The company that I will be looking at today is Priceline Group Inc (NASDAQ:PCLN).
Quick Background:
From the 2013 annual report:
PCLN was founded in April 1998, and went public soon after, in March 1999. The company has roughly 9,000 employees, and has six major brands: Booking.com, Priceline.com, agoda.com, KAYAK, rentalcars.com, OpenTable; the company makes its money via transaction and booking fees. PCLN’s main competitors in the space include Expedia Inc (EXPE), Orbitz Worldwide (OWW), Travelocity (private), and CTrip International (CTRP). PCLN is internationally-focused, losing out to Expedia in US market share, but owning Europe; Booking.com alone controls about 30% of the European market. PCLN is also expanding into the Chinese markets by allying with CTRP, the biggest online travel agency in China.
For more basic information, check out the company’s website and the above links.
Fun fact: An investment of $10,000 in December 2000 would be worth $1,471,153.30 today, split-adjusted (Source: FAST Graphs). That’s an annualized ROR of 43.7%! I think the proper term for that is damn.
Investment Criteria:
So now that we have a basic understanding of who PCLN is and what it does, let’s run our growth stock screening criteria on it:
- I may only invest in technology companies in sub-sectors I understand (usually software): Yes
- The company must have a ‘narrow” or better economic moat, based on Morningstar’s judgment: Yes (Narrow)
- The company must have a quality rating of ‘B’ or better (‘A’ or better preferred), according to S&P’s credit ratings: Yes (BBB+)
- Earnings must be on a consistent and significant uptrend since going public or 5 years, whichever is shorter: Yes
- FAST Graphs must show undervaluation based on the Normal P/E ratio (the blue line): Yes
- Expected return is 8% or more over the next 5 years, according to FAST Graphs: Yes (18.1%)
For your convenience:
Other Bonus Ratings:
- S&P Capital IQ: 3-star hold
- Scale is 1-5, 1 being ‘strong sell’, 5 being ‘strong buy’
- Thompson Reuters StockReport: 7 (optimized score of 3)
- Scale is 1-10, 10 being best, 1 being worst
- Optimized scores weight insider trading and price momentum heavier than other criteria
- Value Line: 3 for safety; 3 for timeliness
- Scale is 1-5, 1 being best, 5 being worst
Thoughts:
The company does not pay a dividend, and does not expect to for the foreseeable future, preferring to invest profits back into the business. However, the company likes to buy back stock, repurchasing $1.2 billion in shares in the past 3 years.
The company is expanding extremely fast; for 2Q14, gross bookings were $13.5 billion. 34% higher than one year ago. Profits increased 36% to $1.9 billion, of which international operations contributed $1.65 billion (a 38% increase). GAAP net income was $10.89 a share, an increase of 29.8% (from $8.39) in 2Q13. The profit margin for PCLN is 27.96%, almost double the peer average of 14.68% (Source: Scottrade). PCLN’s current P/E ratio is a little high at 28.55, but 1-year forward P/E is predicted to be 17.7, supporting the high-growth story. Adding to the strong financials, the long-term debt-to-equity ratio is only 0.2, 1/3 less than its peer group. (Source: Scottrade).
Separately, Morningstar assigns a Stewardship Rating of ‘Exemplary’ on PCLN, naming a history of strategic and successful acquisitions, especially in international markets, and the 52-fold increase in stock price since 2001. It is a ‘narrow’-moat stock; Morningstar cites its solid travel network: “Travelers are attracted to Priceline.com because of its massive inventory of hotels, airlines, and other travel providers, which for Booking.com alone, includes 535,000 properties in more than 205 countries and territories in 42 languages, including more than 190,000 vacation rental properties.” However, since the tech industry by nature is very fluid and dynamic, there is always a chance for disruption by a new start-up. Conversely, large companies like Google or Facebook could enter the space at some point.
For the next five years, it’s projected that earnings will grow 21.0%, and the estimated total return will be 18.1%, which is very respectable. For comparison, EXPE’s is 13.2% and OWW’s is 26.4% (Source: FAST Graphs). But since OWW is so much smaller than PCLN, and lacks many of the same competitive advantages and name recognition, I”m not very impressed. I still view PCLN as best-of-breed.
Some good SeekingAlpha articles on PCLN can be found here, here, here, and here.
Final conclusion:
I believe PCLN is an attractive investment. As one of the largest online travel companies in the world, PCLN has a lot going for it. The international focus, high growth and profitability, compelling fundamentals compared to its peer group, and solid network should assure its dominance in the sector for years to come. Since people like price points, so here’s what I would do (rough estimates based on FAST Graphs):
- Buy a full position at: $1,240.00 or below
- Add to/accumulate between: $1,240.00 and $1,370.00
- Hold only at: $1,370.00 or above
What do you think? Does PCLN make the cut for your portfolio? Also, how can I improve future analyses?
Disclosure: None. I do intend to make this my November purchase, though that is contingent on market valuations at the time of purchase.
All data is accurate as of 10/01/2014. My stock analysis archive page has been updated accordingly. Please read my disclaimer here before choosing to invest. Image source is available here. Data source is FAST Graphs or company materials, unless otherwise indicated.
2 Comments
PCLN certainly has all the elements to continue growing and you make a good case but for my money it doesn’t belong in my portfolio for one reason, lack of dividend payments. I’ll freely admit I’m happy to miss out on any high growth stock for stable dividend payers. I’m not the type to stare at my stocks every day, every hour, every minute as with some tech stock. Give me the old reliables instead so I can sleep. Thanks for sharing your analysis.
Yeah, can’t say I blame you. Wouldn’t be a fit for most people because of the lack of dividends, and it is kind of annoying to me too. I do have that separate growth portfolio based on my strengths as a professional, and I do think it would fit there, but what’s a good choice for me may not be for others. So be it. Thanks for your input!