Priceline: More Headwinds Ahead

Priceline.com ("PCLN" or the "Company") reported earnings in early August, exceeding Street estimates and raising guidance for the year.  On the surface, those results would usually lead to a strong rally in the stock, but PCLN shares instead fell by over 10% after earnings.  Even with the stock under $100 and over 30% off its peak, shares in PCLN may still be overvalued given the headwinds currently facing the Company.

Smaller "Beat" Rates: PCLN has benefited from good execution by management and management's ability to outperform not only its own expectations, but Street expectations as well.  However, the Company's Q2 beat was its smallest in six quarters, beating Street estimates by just 9.9%.  With the exception of the Company's Q1 08, the trend in terms of the size of the EPS beat has been declining over the past several quarters.  PCLN has been a classic "beat and raise" story for the past few years, but the level of both the "beat and raise" is decreasing. As PCLN's earnings growth decelerates, PCLN's valuation multiples could experience compression, further pressuring shares.

TABLE I: PCLN ACTUAL VS. CONSENSUS ESTIMATES