By Kris Rosemann
Priceline (PCLN) reported solid first quarter 2016 results May 4, but the company has since been punished. The past few years have been a roller-coaster ride for shares, but the company has always seemed to bounce back after issuing “disappointing” guidance. Investors will likely never be fans of the conservative guidance issuing style of the company, and that’s okay.
Both Priceline’s gross travel bookings, net of cancellations, and gross profit grew 21% from the year-ago period in the quarter, and the firm’s gross profit rate expanded nearly 2 percentage points from the first quarter of 2015. Adjusted EBITDA advanced at an even more impressive rate, jumping 27% on a year-over-year basis, and non-GAAP income per diluted share leapt to $10.54 from $8.12 in the comparable period of 2015.
Priceline’s cash profile remains stronger than most as well. As of the end of the first quarter of 2016, the firm had nearly $11 billion in cash and cash equivalents, restricted cash, and short and long-term investments compared to long-term debt of $6.3 billion. Free cash flow in the quarter jumped more than 60% from the first quarter of 2015, even as capital expenditures came in nearly two thirds higher than the year-ago period. Priceline’s guidance for the second quarter of 2016 disappointed the Street, bringing an onslaught of selling in shares, however.
We’re not overreacting. The growth in gross travel bookings in the second quarter of 2016 may be expected to slow on a constant-currency basis from the growth achieved in the second quarter of 2015 (11%-18% versus 26%). However, reported growth, which includes currency shifts, is still expected to be higher by a nice double-digit rate, a pace that’s in-line to materially higher than the comparable growth rate in the second quarter of 2015. The company’s non-GAAP income per diluted share guidance also came in below consensus expectations for the quarter, and the guidance range was below the reported number for the year-ago period. Investors should note, however, that Priceline has reported non-GAAP income per diluted share beats greater than $0.80 in each of the last three periods! We’re expecting another beat.
The recent resignation of CEO Darren Huston over what has been dubbed a breach of code of conduct surrounding a personal relationship with an employee may be piling on to the skittishness of investors. We’re not overly concerned with the situation, especially after the firm placed former CEO Jeffrey Boyd back in the position on an interim basis while it searches for a permanent replacement. We think this may be a relative advantage over CEO drama other firms might face, since the interim CEO has material experience and a high degree of familiarity in running the business.
Priceline’s peer Expedia (EXPE) saw itself catching a nice updraft after its first quarter report April 29, despite the fact that it noted coming headwinds in its second quarter of 2016 as well. The firm reported a solid beat in the first quarter, but pointed to headwinds such as the shift of Easter to the first quarter as a reason to reiterate full-year guidance instead of raising it. Expedia did not issue specific guidance for the second quarter of the year as it reiterated its 2016 outlook, likely a contributing factor to the huge difference in reactions to the two firms’ quarterly reports. Perhaps Priceline should adopt a similar policy of only issuing annual guidance?
We trust readers have been able to keep the story arc of Priceline in mind throughout all of this; this is not the first time the company has been punished by investors for issuing weak guidance, see “Priceline Sets Up for Second-Quarter Beat (May 2015),” and “Investors Punish Priceline for Conservative Guidance (November 2015).” Also, as President of Investment Research Brian Nelson, CFA, said as recently in a late March piece, “Terrorist Activity Tramples Travel Stocks… (March 2016).”
Best Ideas Newsletter portfolio holding Priceline is trading off modestly ~2.5% at the time of this writing, but we think its fundamental performance was tracking far ahead of targets to this point in the quarter, and we’re expecting a solid first-quarter report and conservative forward guidance all the same when it issues an update in coming weeks.
We continue to have confidence in the long-term fundamentals of Priceline. Though we are not turning a blind eye to the recent developments, everything should be taken in the proper context. Priceline’s shares have doubled since the end of 2013, and it’s worth emphasizing that new ideas surfaced in the current market environment have a greater likelihood of facing rough patches than perhaps at any other time in the past six or seven years. One might also expect Priceline’s shares to “close the gap” to price levels near its fourth quarter 2015 report in mid-February, but shares of Priceline have made similar moves before, most recently after the fourth quarter report of 2014 in early 2015. Priceline remains a holding in the Best Ideas Newsletter portfolio.