Priceline Group (PCLN) has an odd history as a stock. It showed up around the time of the dot-com bubble, just when travel was starting to move online. It debuted at a split-adjusted price of around $444, soared to $974 … and then as the bubble burst, the stock fell to less than $8 per share.
Oh, and by “split-adjusted”, I mean “reverse split-adjusted”. PCLN stock was in so much trouble that in 2003, it executed a 1-for-6 reverse split. It remained moribund for five years. It leapt to around $135 right before the financial crisis, sold off about 50% like everything else did … but then began a relentless rise from $52 to $1,378.
Around the time the stock hit $700, I embarked on a strategy to profit from the stock’s rise without taking on too much risk. You see, the new incarnation of Priceline was that it became a cash cow. It generated so much free cash flow (with barely any capital expenditure), that it banked billions in cash.
I would back the cash per share out of the stock price and be left with an effective stock price. That number was far below the EPS growth rate of PCLN stock. So I started selling naked puts four to six months out at that strike price, and kept repeating the process for over a year, netting some $15,000 in income.
The theory was simple: If the stock ever got put to me, I would be getting it at a price that was either going to be at fair value or below. My current holding is a July 1085 naked put. The stock is trading at $1,180 right now. It could get put to me well in advance of July, and I actually hope it does.
That’s because Priceline remains as vibrant as ever, with earnings coming up next week. It continues robust domestic growth, while its international offerings continue to soar. All of its competitors are seeing declining operating margins, while PCLN stock continues to increase (from 20% in 2009 to 35.5% today).
Priceline owns several major brands: Booking.com, Priceline.com, Agoda.com, Kayak.com, and Rentalcars.com. I use them all personally. While Expedia (EXPE) remains a major competitor, it doesn’t enjoy the same success as Priceline, nor does it have as solid a balance sheet.
And what a balance sheet! PCLN has $6.76 billion in cash, offset by only $1.75 billion in long term debt. This is the most debt it has ever carried. The $5 billion of net cash represents just under $100 per share. Thus, the stock trades at an effective price of $1,040.
EPS estimates for this year are averaging $51.86 per share, up from $41.72 last year, or 24.3% growth. FY15 estimates are for $63.95, or a 23.3% increase. Analysts peg 5-year projections at a 19.69% annualized growth rate. So let’s place a 20x estimate on this year’s earnings. That gets us a fair value of $1,036 … right around the effective price of PCLN stock.
When one considers PCLN stock’s continually increasing free cash flow, it becomes even more of a value. From $1.3 billion in FCF in FY11, to $1.73 billion in FY12, to $2.22 billion last year, there’s lots of cash to play with.
The bottom line: PCLN stock is a screaming buy.
Lawrence Meyers holds a July naked $1,085 PCLN put.