By Kris Rosemann
Shares of Best Idea Newsletter portfolio holding Priceline (PCLN) experienced a healthy bounce following its 2016 second quarter report after the close August 4 as results came in above its guidance for the period. We think the firm is beginning to gain a reputation for setting conservative guidance only to report much stronger results, something we have seen repeatedly from it in recent quarters “Priceline Shares Under Pressure… Again.”
Gross travel bookings growth came in at 19% on a year-over-year basis as reported, which is above the 11%-18% guidance range management issued for the period and an acceleration from the second quarter of 2015 reported growth rate of 11% (gross travel bookings growth decelerated in constant currency, however). Gross profit in the quarter advanced 16%, or equal to the upper bound of the firm’s growth rate guidance range. The company also outperformed its non-GAAP net income per diluted share guidance range of $11.60-$12.50, as it came in at $13.93 or a 12% increase from the year-ago period.
Management expressed its pleasure with its ability to control operating expenses, a key strength of its business, even as non-GAAP operating margins fell more than three percentage points from the comparable period in 2015 due in part to timing shifts related to Easter, performance advertising, and shifts in brand advertising. Nevertheless, the margin contraction was better than the firm expected in the period. The company did note that advertising ROIs are likely to begin to appear pressured on a comparative basis as a result of its lapping the point in 2015 at which ROIs improved materially.
Priceline continues to generate substantial amounts of free cash flow as a result of its solid execution. Free cash flow through the first half of 2016 leapt nearly 45% on a year-over-year basis to just under $1.2 billion. Such cash flow prowess affords the company meaningful financial flexibility; as of the end of the second quarter of 2016, it had more than $12.3 billion in cash and cash equivalents, restricted cash, and short and long-term investments compared to long-term debt of less than $7.3 billion.
On the quarterly conference call, management indicated that its momentum in gross bookings growth has continued into the third quarter of the year thanks to strong demand in its key geographic regions despite the recent frequency of terror activity across the globe. Priceline is expecting bookings growth to decelerate through the course of the third quarter, as is consistent with long-term travel trends, and the recent strengthening of the US dollar has the potential to provide an increased drag on its reported results.
Total gross bookings are expected to grow 14%-19% in the third quarter of 2016, and gross profit is anticipated to be up 15%-20% on an as-reported basis from the third quarter of 2015. Non-GAAP diluted earnings per share have been projected to be in a range of $28.30-$29.80, the midpoint of which represents 15% growth on a year-over-year basis, despite expectations for deleveraging in non-GAAP operating margins from the comparable period in 2015 as the firm trades some ROI for flexibility in its operations.
We like what we’ve seen from Priceline following the second quarter of 2016, and though shares have a great deal of upside based on the upper bound of our fair value range of $1,760, we’re expecting ongoing volatility in them. In each of the firm’s past eight quarterly reports, its shares have either gapped up or down, alternating between the two without disruption since its report in the third quarter of 2014. We’re staying buckled in to our position in Priceline for the time being, in hopes that this stock travels well past our fair value estimate.