Pcln Equity Research Report

...

The stock has shown strong price momentum since then. Positive sentiment has been reiterated in the last 2 weeks with 6 earnings revision before Priceline's latest earnings report. On 7th November, it beat earnings estimate of $29.92 by 4.2% and the stock rose by 6.6% on the day. Its trend of strong earnings momentum (successive earnings beat going back over 4 years) combined with its price momentum should act as a catalyst for a move higher for the stock.

VALUATION

My DCF model indicates that the Priceline Group's shares are worth $1,765 each. Shares are currently trading at $1,553. This indicates a 14% upside potential. The model reflects a CAGR of 18.0% during the next five years, a pace lower than the firm's 3-year historical CAGR of 20.6%, but slightly higher than analyst's estimates of 16.0%. 5-year projected average operating margin is 42.0%. This is above Priceline's trailing 3-year average of 35.0% because of reduced advertising costs. Beyond year 5, I assume free cash flow will grow at 5.0% for the next 10 years and 3.0% in perpetuity. I use a 10.45% WACC to discount future FCF based on 11.0% cost of equity and 4.9% cost of debt. Historical comparison bolsters Priceline's undervalued claim. It's P/S of 7.5, Forward P/E of 20.2 and EV/EBITDA of 19.9 are all below its 5-year average. While expected growth for the firm has decreased, a PEG ratio of 1.3 is by no means high for a company still growing at over 15%.

My model's target price of $1,765 is slightly above aggregate analyst estimate of $1,727. My sales forecast and operating margins are above consensus estimates, and the divergence increases further into the forecast. Analysts seem to be more conservative in their approach due to political and economic concerns. However, with 6 upgrades in the last 2 weeks and average analyst estimate up from $1,600, the stock is gaining positive sentiment. Other analysts should follow with improved price targets.

ECONOMIC RISKS

Concerns over European GDP, Brexit, foreign exchange rates, terrorism, and oil prices have caused the Priceline stock to be undervalued. The Paris and Brussels attacks had a significant impact on the tourism industry and Priceline in 2015 and 2016. Britain exiting the EU will no doubt an impact, but the scale of impact is too early to tell. The USD significantly strengthened against the Euro in the past few years, moving from 1.38 USD per Euro in 2014 to 1.09 today. This resulted in Priceline's 2015 gross profit from international businesses to increase by only 11.6% in USD, when it grew on a constant currency basis by 28%. Oil prices also saw somewhat of a resurgence in 2016 hampering the travel industry. While these concerns are real they have been largely overblown. European GDP is still projected at 1.6% for 2016 and 1.8% for 2017. Data from European tourism also indicates that the travel industry in Europe continues to see growth with forecasts of over 4% growth in 2017 and 2018.

While it is not possible to accurately predict economic and political circumstances, Priceline's strong financial performance and growth in the last two years portrays its ability to withstand heavy pressures. The stock price has jumped in the last few months but the weight of economic and political concerns is still unwarranted; Priceline's business quality, combined with growth potential, and price momentum presents a good price point to buy the stock.

Work Cited

Ellyatt, Holly. “EU Commission cuts euro zone GDP growth forecast”. CNBC. 3 May. 2016. Web. 04 Nov. 2016

Gonzalo, Frederic. “The OTA Duopoly: Priceline vs Expedia.” EHotelier.com, 16 Dec. 2016. Web 28 Oct. 2016.

Kessler, Aaron. Weed, Julie. “Hotels Fight Back Against Sites Like Expedia and Priceline”. NYTimes.com NY Times. 31 Aug. 2016. Web. 02 Nov. 2016

McCartney, Scott. “When Paris Hurts, So Does the Travel Industry.” WSJ.com. The Wall Street Journal, 16 Dec. 2016. Web, 01 Mov. 2016

Nowak, Brian. “Priceline Target Price Raised by Morgan Stanley, Rated Up.” Nasdaq.com. Morgan Stanley, 01 Jul. 2016. Web. 05 Nov. 2016

"Priceline Group." Management Team. Priceline, n.d. Web. 04 Nov. 2016.

Santos, Paulo. “Airbnb is Coming for Priceline and Others.” SeekingAlpha.com. Seeking Alpha, 24 Sep. 2016. Web. 28 Oct. 2016

Schaal, Dennis. “The State of Online Travel Agencies- Strong Growth but Big Challenges Ahead.” Skift.com. Skift, 07 Jul. 2016. Web. 04 Nov. 2016.

“Street Insider.” “Morgan Stanley Upgrades the Priceline Group to Overweight; ‘Ad War is Over’ says Analyst”. 30 Jun. 2016. Web. 04 Nov. 2016

The Priceline Group. 2015 Annual Report, 2016. Web. 02 Nov. 2016.

The Organization for Economic Co-operation and Development. Euro Area- Economic Forecast summary, Jun. 2016. Web. 01 Nov. 2016

Vynck, Gerrit De. "Priceline CEO Resigns After Relationship with Employee." Bloomberg.com. Bloomberg, 28 Apr. 2016. Web. 04 Nov. 2016.

Appendix

Fig I. Priceline Historical Profitability Growth (Source: Factset)

[pic 1]

Fig II. Priceline Historical Financial Health (Source: Factset)

[pic 2]

Fig III. Priceline Historical Growth (Source: Factset)

[pic 3]

Fig. IV. OTA Value sales by Region (Source: Euromonitor International EStimates)

[pic 4]

Fig V. PCLN vs SP500 over 5 years (Source: Factset)

[pic 5]

Fig VI: PCLN vs SP500 over 1 year (Source: Factset)

[pic 6]

Fig VII: PCLN vs EXPE over 5 years (Source: Factset)

[pic 7]

Fig VIII: PCLN vs EXPE over 1 year (Source: Factset)

[pic