Shares of Priceline Group Inc (NASDAQ:PCLN) have been on fire — not just in 2017, but over the last several years. In this year alone, PCLN stock is up nearly 40%. Over the past 12 months, it’s up 44% and more than 200% over the past five years.
Given that kind of performance, why should investors take a pass ahead of Priceline earnings? Because it may have rallied too far, too fast. Its fundamentals and technicals are questionable and we don’t like to buy into questionable situations. That goes even for companies with an excellent business.
What’s So Great About Priceline?
First, the underlying business for Priceline is going well. Economies around the world are strengthening, particularly in the U.S. and Europe. That bodes well for travel companies like Priceline and Expedia Inc (NASDAQ:EXPE).
Analysts expect sales to grow about 15.5% annually for the next two years. Forecasts call for 13% earnings growth in 2017 and 16.5% growth in 2018. Priceline’s 2013 acquisition of Kayak for just $1.8 billion is helping to drive sustained growth by taking market share. At the same time, secular trends are paving a smooth and long runway for the sector. Other acquisitions, like OpenTable, have also been a factor in PCLN’s growth.
Priceline’s recent purchase of Momondo for $550 million should help as well. “Momondo and Cheapflights are premium brands that have garnered a loyal customer base throughout key markets in Europe,” Priceline CEO and President Glenn Fogel said just last week after closing the deal.
Strong earnings and sales growth, a strong underlying market and key acquisitions. What’s not to like about Priceline?
The Issues for PCLN Stock
Over the last 10 years, PCLN stock has rarely topped a price-to-earnings ratio of 45. When it does, the P/E ratio isn’t able to sustain those levels. Also, its price-to-sales figure usually hovers around 7x. Now it’s at 9.1x. Over the last decade, this figure has climbed north of 8.5x four other times. All four times it corrected lower.
Remember, Priceline is a great business — one that is certainly hard to doubt given its years of success. But PCLN stock has a history of failing to garner a valuation much higher than current levels. History suggests it won’t.