Priceline: More Headwinds Ahead
Priceline.com ("PCLN" or the "Company") reported earnings in early August, exceeding Street estimates and raising guidance for the year. On the surface, those results would usually lead to a strong rally in the stock, but PCLN shares instead fell by over 10% after earnings. 
Even with the stock under $100 and over 30% off its peak, shares in PCLN may still be overvalued given the headwinds currently facing the Company.
Smaller "Beat" Rates: PCLN has benefited from good execution by management and management's ability to outperform not only its own expectations, but Street expectations as well. However, the Company's Q2 beat was its smallest in six quarters, beating Street estimates by just 9.9%. With the exception of the Company's Q1 08, the trend in terms of the size of the EPS beat has been declining over the past several quarters. PCLN has been a classic "beat and raise" story for the past few years, but the level of both the "beat and raise" is decreasing. As PCLN's earnings growth decelerates, PCLN's valuation multiples could experience compression, further pressuring shares.
TABLE I: PCLN ACTUAL VS. CONSENSUS ESTIMATES
Guidance Assumptions: Another reason for concern is that PCLN's forward guidance incorporates a few assumptions that may prove vulnerable.
While management has done a good job in operating PCLN, the Company has benefited tremendously from the EUR/USD exchange rate as the EUR has appreciated significantly against the USD. In Q2 07 the exchange rate was EUR1.35/1.00USD while in Q2 08 the exchange rate was EUR1.55/1.00USD. In Q2 08, revenues were up 82% but in local currency the growth was 66%. Given PCLN's valuation and expectations, the EUR/USD exchange rate may be obscuring the true forward earnings power of PCLN. PCLN does not fully hedge its FX risk either. Management's guidance for 2008 incorporates the expectation that the EUR/USD exchange rate will be EUR1.55/1.00USD while the current exchange rate is EUR1.47/1.00USD. Despite this 5% decline in the EUR/USD exchange rate and the fact that over 40% of PCLN's revenues are generated in foreign currencies, analysts have not made any adjustments to their estimates.
Another aspect of management's guidance relates to Average Daily Rates ("ADRs") charged by hotels. Management expects ADRs to be flat in the U.S. and down 1-2% year over year in Europe. ADRs are driven in part by hotel occupancy rates and given that the U.S. is in a recession and Europe is experiencing a slowdown across many of its countries, this assumption could be at risk as leisure travel abates, reducing occupancy rates and ADRs. According to PCLN's filings, the Company's fees are proportionately tied to ADRs so lower ADRs negatively impact PCLN's hotel business and gross profits.
Airline Consolidation: The consolidation occurring in the airline industry could also pressure PCLN. While the Company is not as dependent on the airline business as its competitors, as airlines merge and strip out excess capacity via reduced routes and flights, the cost of air travel will rise and possibly reduce the amount of leisure travel. Consequently, second order effects of airline consolidation could be reduced lodging and rental car demand which would adversely impact the Company.
Increased International Competition: PCLN has done an excellent job with Booking.com but competitors like Expedia.com ("EXPE") have been making inroads in Europe. EXPE's purchase of Venere could pose a threat to the Company in the form of requiring additional advertising spending by PCLN to offset competition by Venere. In addition, PCLN's Booking.com business has been maturing and as this occurs, PCLN will require greater incremental spending to generate similar levels of growth.
While PCLN is the best operator in its sector, the valuation premium it commands relative to its recent "underperformance" relative to expectations and very real headwinds it faces make the Company much more vulnerable than peers to a significant correction in its valuation.
DISCLOSURE: AUTHOR MANAGES A HEDGE FUND THAT IS SHORT PCLN
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This article has 3 comments:
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Think-About-It
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95 Comments
Aug 29 02:59 PM"While PCLN is the best operator in its sector... "
Your short thesis appears to be purely one of valuation and not quality. This means that time is not on your side. The longer you wait to close your short position the more the company grows into it's current valuation -- closing your assumed valuation gap.
Let's look at valuation: 2009 EPS = $7.05est
at $94/shr that's a forward PE of 13.3
Their 2009 growth rate = 17% and post 2009 should be able to grow 13% - 15%.
How is this an over valued stock price? Looks like a fair value for a quality growth company to me. Maybe even a bit of a discount. There are a lot better candidates for shorting than PCLN.
Even if you drop the 2009 EPS estimate from $7.05 to $6.48 you are still looking at a forward PE of 14.5. Reasonable by any measure.
I do agree with you economic concerns about the U.S and Europe but would not bank on the Dollar holding its value or rising over next year or so which was one reason you thought earnings expectations might be to high.
Two questions for you:
1. How much revenue does PCLN get from Asia?
2. Is there an Asian PCLN out there like Bidu is to Google?
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John C. Lee
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133 Comments
My Website
Aug 29 05:30 PM-
bafnotrad
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5 Comments
Aug 30 12:53 PMThe Financial Accounting Standards Board issued an accounting rule change that will significantly impact the accounting for our convertible debt.
The Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. APB 14-a, “Accounting for Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-a”). FSP APB 14-a requires cash settled convertible debt, such as our $520 million aggregate principal amount of convertible senior notes that are currently outstanding, to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component would be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value, representing the value assigned to the equity component, would be recorded as a debt discount and amortized to interest expense over the life of the bond. In addition, if our convertible debt is redeemed or converted prior to maturity and the fair value of the debt component immediately prior to extinguishment exceeds the carrying value it will result in a loss on extinguishment. Although FSP APB 14-a will have no impact on our actual past or future cash flows, it will require us to record a significant amount of non-cash interest expense as the debt discount is amortized and may result in losses on extinguishment that would not have occurred under previous GAAP. FSP APB 14-a is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are in the process of evaluating the impact of this new standard, but expect that it will have a material adverse impact on our results of operations and earnings per share.