Shares of PCLN are up over 120% YTD. The company has become dominant in the U.S. and Europe for discount travel with plans to replicate their success in Asia. Priceline is a global online travel company that offers its customers a range of travel services, including hotel rooms, car rentals, airline tickets, vacation packages, cruises and destination services.
We believe PCLN will continue to grow nicely but the stock has gotten ahead of the fundamentals. As of 9/30/09, over 7 million shares were short with 9.3 days to cover. Short interest peaked on 4/15/09 with 11.3 million shares short. Much of the run in PCLN is likely due to shorts covering into the current market rally. At some point, Priceline will revert back to more normal valuation and growth trends which will put pressure on the stock.
12 analysts cover Priceline with a median price target of 179.50. FY10 average estimates are at 8.92 so at 19 times earnings you get a 169 fair value but we see this as the best case scenario.
Below are some of the issues facing PCLN:
- Top Line Yr/Yr Revenue Growth Rates Slowing - PCLN’s revenue grew rapidly over the past 3 years but it will have a tough time growing at the same pace moving forward given the larger numbers.
- Price to Sales Ratio outside of normal range. PCLN trades at 3.5 times sales and above levels where it last sold off.
- TTM Price to Earnings Ratio at high end of historical range.
- Gross Profit Margins increased significantly over the last 3 years but Net Profit Margins remain in the 10 to 15% range per quarter.
- Priceline.com traffic down in Q3 according to Google Trends and Compete.com .
Bulls in PCLN can take some comfort in the simple calculation of the FY10 analyst estimate times the earnings growth rate mentioned previously.
Bears can point to the erratic EPS trends to discount the 8.92 estimates for FY10 and beyond. If you assume a 6.00 to 7.00 EPS for the next couple of years, the fair value is closer to 114 to 133.
We tend to agree with the bearish view at this point.
Disclosure: No Position
$170.395 (10/14/09)
