Priceline (PCLN) earnings served up a revenue miss and a disappointing forecast, but profit still beat Wall Street estimates by a wide margin, and that was more than good enough for the market. PCLN jumped nearly 4% at the opening bell.
After a torrid 2013 in which Priceline stock rose more than 90%, shares have cooled off. Sure, the 13% for PCLN so far this year doubles that of the broader market, but it pales in comparison to what holders of Priceline stock have come to expect.
Priceline stock has been driven by the company’s track record of increasing revenue by at least 20% a year for the last seven years, boosted by international expansion and, more recently, acquisitions.
Investments and acquisitions are costly, however, and those expenses have been a factor in taming Priceline stock. Indeed, costs from building out its international business are what caused the company to issue a forecast that was below analysts’ average estimate.
Ordinarily, the market would punish such a forecast, but there’s a good chance PCLN is lowballing. Most companies do, since it’s always better to under-promise and over-deliver. It’s also just good thinking when some of your expenses are a moving target.
As CEO Darren Huston told Bloomberg:
“We’re quite prudent in the way we give guidance, particularly in costs we can’t control including online marketing costs. We’re spending a little more in offline marketing, more than people would assume.”
International Key to Upside in Priceline Stock
At the same time, Priceline earnings were solid. For the most recent quarter, profit increased 32%, helped by strong growth in international bookings. The international business increased by more than a third to account for 86% of total bookings.
On a net basis, earnings rose to $576.5 million, or $10.89 per share, from from $437.3 million, or $8.39 per share, in last year’s second quarter. After excluding special items (as analysts do) Priceline earnings came to $12.51. That surpassed analysts’ forecast by 47 cents — a good-sized earnings beat, even for a stock with an EPS of more than $12.
Revenue rose 26% to $2.12 billion, which was shy of Street projections for $2.15 billion. Most damaging, however, was third-quarter guidance. PCLN expects current-quarter earnings to come in between $19.60 and $21.10 per share. The Street was looking for $21.28.
As ugly as that looks on the face of it, it’s not so bad. The mid-point of Priceline’s updated guidance implies an 18% gain in third-quarter earnings per share. That’s in line with its long-term growth forecast and certainly ample enough to justify a forward price-to-earnings (P/E) multiple of 20.
It’s not as if PCLN was wildly overpriced heading into the earnings release. Heck, Priceline stock is cheaper than the S&P 500 when comparing forward P/E to long-term growth prospects.
Furthermore, Priceline’s growth targets look more than attainable. Acquisitions like OpenTable and Kayak — and a $500 million investment in China’s Ctrip (CTRP) — should help PCLN extend its lead as the largest booking site by revenue.
Priceline stock isn’t going to have another year like 2013, but it should certainly keep beating the broader market from here on out.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.