Let’s take a look at Best Idea Newsletter holding Priceline’s (PCLN) third quarter 2016 report, released November 7.
Image Source: Priceline
What management said:
“The Priceline Group brands executed well during our peak summer travel season,” said Jeffery H. Boyd, Chairman and Interim Chief Executive Officer of The Priceline Group. “Globally, our accommodation business booked 150 million room nights in the 3rd quarter, up 29% over the same period last year. The acceleration in room night growth demonstrates the favorable market in which we operate as well as the value of our diverse global platform.”
Shares are breaking out…
The scoop:
Priceline executed fantastically in its peak summer travel season, turning in 25% gross travel bookings growth in the third quarter of 2016 on a year-over-year basis. Gross profit leapt 22% in the quarter, led by its international operations, which reported a 25% increase in gross profit from the year-ago period.
Non-GAAP net income per diluted share came in at an impressive $31.18 in the quarter, a 23% jump from the comparable period in 2015 and a favorable comparison to consensus estimates of $29.92. However, an impairment charge of OpenTable’s goodwill of $941 million related to a change in business strategy resulted in GAAP net income per share being more than halved compared to the third quarter of 2015.
Free cash flow generation continues to be a strong point for Priceline; through the first nine months of 2016, the firm advanced free cash flow by nearly 27%, to $2.7 billion (or ~31.6% of revenue). What we find almost hard to believe is how capital-light Priceline’s business truly is, even for a dot-com entity. Capital expenditures as a percentage of cash flow from operations were a mere 6% through the first nine months of 2016.
Since 2010, free cash flow has increased at an astounding 30%+ clip!
Image Source: Priceline
Insight from the quarterly conference call:
“So yes, room night performance was strong in the quarter. I said it was strong across all of our key geographic regions. I’d say it was broadly strong across all our demand channels too, so there’s nothing I could call out in particular for you there and it was broad-based strength, the macro environment feels relatively healthy for us. That same story has continued thus far in Q4.” – CFO Daniel Finnegan
“Q4 is off to a solid start, with gross bookings continuing to grow nicely across our key geographic regions. Our guidance assumes that our growth rates will decelerate as we progress through the quarter, … Our guidance also reflect a difficult comp starting in December and running through Q1 2017 … For Q4 guidance, we are forecasting booked room nights to grow by 20% to 25% and total gross bookings to grow by 16% to 21% in U.S. dollars … We expect gross profit to grow by 13% to 18% in U.S. dollars and by 14% to 19% on a constant currency basis. We forecast GAAP EPS between $11.40 and $12.00 per share for Q4, which at the midpoint is up about 17% versus prior year.” – CFO Daniel Finnegan
Are we changing our mind with our position?:
No, Priceline will remain a holding in the Best Ideas Newsletter portfolio. The company is probably one of the best more recent examples of the Valuentum Buying Index in practice. Registering a pristine 10 in February 2015, the equity now has been a strong winner in the portfolio of the Best Ideas Newsletter in a relatively flat market. Our fair value estimate had resided significantly above the stock price until its more recent break-out yesterday. We expect a bump in our fair value estimate of Priceline upon our next update as a result of the better than expected bookings performance.
Priceline benefited from a favorable operating environment in the third quarter of 2016, and concerns over global terrorism seemed to be generally non-existent when it came to robust travel demand. What is really pushing shares higher following the report is management’s optimistic guidance for the fourth quarter compared to its guidance in the same period in 2015, “Investors Punish Priceline for Conservative Guidance (November 2015).” The firm seemed to have made a habit of under-promising and over-delivering, “Priceline Sets Up for Second-Quarter Beat (May 2015),” “The Priceline Group Soars!!! (August 2015),” “Priceline Shares Under Pressure… Again (May 2016),” “Priceline Higher After Outperforming Conservative Guidance (August 2016),” giving us confidence in management’s comparatively stronger targets for the fourth quarter of 2016.
Further, the online travel giant continues to generate substantial free cash flow as it grows at an impressive rate, and we love its net cash position, inclusive of long-term investments, of nearly $6.4 billion as of the end of the third quarter of 2016. Management’s comments regarding fourth-quarter momentum were also quite reassuring to the pace of global economic resilience in the wake of uncertainly caused by Brexit. International business accounts for ~90% of gross bookings, with the US making up the balance. Such a cash-rich business eases our concerns with the risk involved in holding an entity so sensitive to the economic cycle at this mature point in the global economy’s recovery.
Shares will continue to have some room to run based on the upper bound of our fair value range, and we see little to no reason to change our opinion of the firm’s strong fundamentals. For one, its virtuous cycle, image shown below, is still firmly intact and represents one of the strongest competitive advantages a company could ever have. Facebook (FB) and Visa (V), two other Best Ideas Newsletter holdings, benefit from a similar dynamic. We expect Priceline to continue to be a strong performer, though we are aware of the heightened risk of its cyclical tendancies.
Image Source: Priceline
Related ETFs: XLY, IYC