All the investing world was agog and atwitter about Priceline Group’s (PCLN) outright cash purchase of online reservation hub OpenTable (OPEN). Priceline stock dropped on the news of the $2.6 billion purchase, and I can see why.
This is a dumb move.
So, PCLN gobbles up a system of 31,000 restaurants serving some 15 million customers monthly. Ostensibly, it seems like an (over)reaction to TripAdvisor’s (TRIP) purchase of the French online reservation service, La Fourchette. That operation has 12,000 restaurants represented throughout Western Europe.
The TripAdvisor purchase made some sense. If you are browsing TripAdvisor hotels and restaurants in Europe and find something that sounds interesting, the client is pretty likely to cruise on over to La Fourchette and make the booking. Rather than just enjoy a possible affiliate commission with a link, why not own the whole thing?
PCLN buying OpenTable makes no sense at all. The behavior of the PCLN customer has nothing to do with how people use OpenTable. You go on PCLN to book travel. Most people buy their airline, hotel and car rentals there. Let’s say Priceline then tries to push people to OpenTable afterwards, as that strategy makes the most sense.
Well, my behavior is not to book restaurants after purchasing the travel, and I suspect many other people behave the same way. Travel is often booked weeks or months in advance. Restaurants are booked maybe a week out, if that. If you are going to a city that OpenTable serves, and you know people there, they will book a restaurant to take you to. Otherwise, you may book it yourself.
If you book it yourself, then we may all cheer that Priceline makes some money on the booking. But then you have to look at the price that PCLN paid: $2.6 billion … for a company that made $33.4 million in FY13. So, PCLN paid 78 times earnings and almost 40 times cash flow … for a company with projected compound annual EPS growth of 14%.
That $33.4 million is going to be immediately accretive to Priceline stock, so we should all jump for joy, right? Considering Priceline’s net income was $1.9 billion in FY13, that means it will boost PCLN’s net income by a whopping 2%.
When PCLN purchased Kayak.com and CarRentals.com, I thought the prices paid were also too high, but I cut PCLN slack because these are up-and-coming sites with good traffic. PCLN had to purchase them or Expedia (EXPE) might beat them to it.
There is no synergy here that I can see. Worse, PCLN has squandered its massive cash hoard that made the stock a hidden value. Last month, because of that cash hoard, I told you to buy Priceline stock at $1,180. If you did, you did well.
PCLN’s cash hoard is now down to a net position of about $2.4 billion. That’s still about $48 per share in cash, giving Priceline stock an effective price of $1,148, so it trades at 22x this year’s EPS and 18x FY15 EPS. With 20% long-term projected EPS growth, that makes Priceline stock fairly valued in my book.
The stupid acquistion doesn’t mean you can’t buy it here. Based on these projections, you should expect about 20% annual price appreciation. Priceline stock just isn’t the value it used to be, and now I’m questioning management’s judgment.
Lawrence Meyers has no position in any company mentioned.