Priceline Group Inc (PCLN) Stock Could Fall Another 20%

Advertisement

Shares of Priceline Group Inc (NASDAQ:PCLN) are off about 3% on Wednesday morning, brushing the $1,850 area, despite a very solid first-quarter earnings report. To be fair, PCLN stock had run up from $1,738 in the past month, so maybe the market is just selling the news.

Priceline Group Inc (PCLN) Stock Could Fall Another 20%

Source: Priceline.com

Yes, the company’s outlook was “softer than expected” and it “missed estimates.” But I’ve always found it peculiar that when a company reports numbers that are great by any measure, the market gets upset about it because of the expectations game. These excuses are nonsense, and one of the things I teach in my stock advisory newsletter, The Liberty Portfolio, is how to ignore noise like this.

The thing is, I still believe PCLN stock has a lot of downside from here — just not because of anything that was in the company’s first-quarter report.

Priceline Q1 Earnings Recap

Just look at this amazing number: Gross travel books were $20.7 billion, up 24% year-over-year, and 27% on a constant currency basis. This is phenomenal. Not only is the absolute gross dollar bookings number staggering — which goes to show how much of the online travel industry PCLN owns — but a 24% increase? For a company this mature?

Gross profit came in at $2.3 billion, which is a 16% YOY increase, and 17% on a constant currency basis. So again, this is solid growth. I also want to add that the year to year currency effects are now declining significantly since the dollar has stabilized over the past year. (By the way, $2 billion of that gross profit came from international operations, which also shows that Priceline is now a global juggernaut.)

The bottom line, which is what we really care about, didn’t disappoint this investor. Net income was $456 million, which was up 22% (or $9.11 per share). Tell me where else you can find 22% organic growth in net income from a company this size. It’s not common.

Two other metrics in Priceline’s earnings report piqued my interest:

  • Booking.com has 1.2 million properties on its platform. This includes homes and apartments. When one considers how difficult it is to launch an online travel agency, and to see over a million darn listings on Booking.com, you get an idea about just how powerful this business model can be.
  • Rental car days increased 15% year over year. This even accelerated from 14% in the previous quarter. While rental car companies are struggling because of Uber, can someone guess why Priceline is still booking the darn things? We’ll have to parse the conference call, but my guess is that these are international rentals, where Uber hasn’t gotten a solid foothold.

As for guidance being “soft,” that’s ridiculous. For Q2, PCLN expects …

  • Room nights booked to increase from 16% to 21%
  • Total gross travel bookings up 12% to 17% (add 300 bps for constant currency)
  • Gross profit increases of 14% to 19% (add 300 bps for constant currency)
  • Adjusted EBITDA between $860 million and $905 million.

The balance sheet remains in fantastic shape, with $15 billion of cash and investments offset by $7.3 billion in debt, or $150 per share in net cash.

The thing I’ve always loved about PCLN stock is that it is basically a cash flow generator. Because it’s an online business, there’s no capex, so operational cash flow generally is very similar to free cash flow. Operational cash flow this quarter was a sparkling $380 million.

So, What’s Wrong With PCLN Stock?

That takes us to where we always must go: What do we do with Priceline?

With about $2.2 billion in trailing-12-month net income, and a market cap of about $90 billion, you’re talking about PCLN stock trading at 36 times earnings (net of cash). With net income growing at about 18% annually according to analysts, Priceline shares boast a price/earnings-to-growth ratio of 2. While that’s technically overvalued (anything above 1 is considered too pricey), that’s right at the upper range of where I typically feel comfortable buying.

But to be honest, I wouldn’t buy PCLN here.

I would certainly hold if you plan on carrying Priceline for the very long-term. The problem is that the entire market is overpriced, and a correction is soon to follow. Highflying stocks such as Priceline always tend to take a bath as investors take profits in those kinds of situations, whether it’s fair or not.

The Priceline Group Inc. (PCLN) stock chart

I think PCLN stock gets it worse than many others, and a fall to as low as $1,500 is possible.

But you can rest assured I’d be a buyer there.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he had sold naked puts against Priceline (October $1680). He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2017/05/priceline-group-inc-pcln-stock-could-fall-another-20-percent/.

©2024 InvestorPlace Media, LLC