Priceline.com (PCLN) is a 1.8% weighting in the Best Ideas Newsletter portfolio.
The global online hotel reservation leader turned heads when it reported first-quarter results May 7, but it was Priceline.com’s conservative outlook that traders decided to focus on instead. Frankly, we’re not too concerned with the company’s “soft” second-quarter guidance, and we point to significant fundamental outperformance in the first quarter as to why. We’re not going to punish the company for being conservative in the midst of significantly volatile foreign-exchange conditions.
First-quarter gross travel bookings at Priceline.com advanced 26% on a constant-currency basis and 12% on a reported basis year-over year. That’s not bad, especially since management had guided to growth in the range of 2%-9% for the period. Gross profit jumped 32% on a constant-currency basis during the quarter, while non-GAAP net income per share edged higher to $8.12 from $7.81 in the year-ago period. Consensus estimates called for $7.72 per share in the period, so Priceline.com handily beat expectations. The company pulled in $209 million in cash from operations, a solid 18% year-over-year increase, while capital spending was ~$31 million, putting free cash flow at ~$178 million in the period.
The executive suite pointed to a strong start to 2015 “with accelerating growth in room nights and rental car days booked.” However, most market participants may have skipped over the all-too-important word “accelerating,” and instead, focused on the firm’s conservative quantitative outlook in the press release. Guidance calling for flat-to-7% expansion in total gross travel bookings and revenue for the second quarter, respectively, wasn’t welcomed whole-heartedly by the markets, but backing out expected currency headwinds, an increase of 15%-22% and 8%-12% for total gross travel bookings and revenue is not too shabby and roughly in-line with what we are modeling.
Priceline.com’s conservative target of non-GAAP net income per diluted share in the range of $10.95-$11.75 for the current quarter was also below the consensus mark of more than $13 per share, but we’re not worried in the slightest. Management has a track record of being conservative, and we think top brass is setting the bar low in the event currency headwinds become even greater. In doing so, we think it has set itself up for another earnings beat. From our perspective, we focus more on operational analysis than on non-operating, financial impacts like currency, which can effectively be hedged away by either the firm or the investor.
Priceline.com stands on a mountain of cash on the balance sheet, with ~$9.6 billion in short-term and long-term cash equivalents against only $5.3 billion in long-term debt at the end of the quarter. In this light, we think the company deserves a stronger rating than what the agencies give it, and that may happen in coming years—but only if the executive suite avoids M&A. Competition from the likes of Expedia (EXPE), which recently scooped up Orbitz, and from other online providers that may want to get their hands on Priceline.com’s Economic Castle, offer some risks to the thesis, but it’s hard not to like a company with a fortress-like balance sheet, strong free-cash-flow generating capacity, and an impressive brand portfolio.
As we outlined when we added Priceline.com to the Best Ideas Newsletter portfolio, there’s a lot of risk including this economically-sensitive equity to the portfolio so late into the global recovery, but we think Priceline.com’s valuation offers a nice margin of safety. We value shares north of $1,600 each, and we think the company will get there before this bull market lets up. It won’t happen tomorrow though, so patience is the order of the day.