This isn’t the first time this year Best Ideas Newsletter portfolio holding Priceline (PCLN) has been punished by investors for issuing weak guidance after a strong quarter (see our first-quarter piece). The strength of the US dollar played an important role in the weakness of the firm’s performance, but we didn’t see any material fundamental deterioration in its operations in the company’s third-quarter results, reported November 9.
Gross travel bookings at Priceline grew ~22% in constant currency and 7% as reported to $14.8 billion in the third quarter on a year-over-year basis. The strength was driven by its international operations, where gross travel bookings grew 25% in constant currency. The company’s global accommodation business booked a record 116 million room nights in the third quarter, good for 22% growth from the year-ago period. Booking.com now has over 820,000 properties with over 21 million bookable rooms available, an increase of approximately 38% from the same time in 2014. This gives the site the largest, most diverse selection of directly bookable accommodations in the world.
Though Priceline’s international bookings continue to expand at a rapid pace, the firm’s US operations have been a source of weakness. Gross travel bookings in the US fell 2.5% in the third quarter on a year-over-year basis, and now account for ~11.5% of the company’s business. The strong US dollar has made the country a less popular destination for international travelers, and the firm also cited a 13% reduction in airfare as having a negative impact on its US gross travel bookings, even as such a step-down had a negligible impact on gross profit.
Despite the top-line weakness, Priceline’s US operations helped drive solid growth in its overall gross profit, which advanced 29% in constant currency and 12% as reported from the year-ago period to $2.9 billion in the third quarter. Gross profit in the firm’s US business advanced 22%, while its international operations grew gross profit 29% in constant currency. This strong constant currency gross profit expansion coupled with slightly improved operating margins resulted in strong bottom-line growth as well. Adjusted EBITDA grew 12% on a year-over-year basis, to $1.6 billion, surpassing the high end of the firm’s guidance range of $1.525 billion.
Non-GAAP net income per diluted share also beat guidance in the third quarter. It grew by more than 14% from the year-ago period to $25.35, compared to guidance for the quarter of $22.95-$24.45 per share. The company’s strong net income performance helped provide solid free cash flow generation through the first three quarters of 2015. Priceline generated nearly $2.1 billion in free cash flow in the period, good for slight growth on a year-over-year basis despite capital expenditures growing nearly 40%. This impressive free cash flow generating ability plays an important role in the maintenance of the firm’s fortress-like balance sheet. As of September 30, Priceline had ~$9.4 billion in short-term and long-term cash and equivalents, compared to ~$5.4 billion in long-term debt.
Nevertheless, Priceline’s shares were beaten up since releasing these seemingly sound results. Investors appear to have concerns with the company’s guidance showing a deceleration in gross bookings growth and gross profit expansion. We aren’t worried about the firm’s operations, and as we mentioned earlier, this is not the first time it has issued perhaps too conservative of guidance. 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 in the portfolio so late into the global recovery, 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.
We currently value shares at nearly $1,700 each, offering investors a solid valuation opportunity. We may add to the position in the Best Ideas Newsletter portfolio on any material weakness.
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