(The following is a condensed write-up from SumZero composed by one of the site's buyside professionals)
Source: Hedge Fund. New York, NY.
I propose a long investment in priceline.com (Nasdaq: PCLN), with a price target of $739/share to be reached within 12-18 months, implying 29% upside from its closing price of $571.32 on February 16th. Improving travel fundamentals, the upcoming Q4 earnings release and above-consensus 2012 EPS should serve as near-term catalysts for the stock’s re-rating.
Priceline derives substantially all of its earnings from hotel bookings, which typically offer higher margins and more stable revenues than airlines and car rental bookings – customers are likely to be less price elastic and drawn to the OTA that offers more selection, customer reviews, and a better user experience.
Priceline is well positioned to take advantage of this market growth given its ownership of Booking.com (70% of bookings), the current market leader in the European OTA space with ~50% market share and nearly 4x the bookings of its next largest competitor, Expedia (Nasdaq: EXPE). The website already accounts for 53% of total hotel bookings in Europe, yet Priceline has invested heavily in building out its brand and infrastructure as a platform for future expansion – it currently has offices in 39 countries, is available in 41 different languages, and already derives an estimated 20% of its bookings from outside of Europe
Priceline currently enjoys higher margins than its competitors (EBITDA % GP: Priceline: 47%, Expedia: 26%, Orbitz (NYSE: OWW) 20%) due to significant operating leverage within its business – operating expenses as a % of gross profit have come down from 73% in 2007 to ~53% in 2011, primarily through savings in SG&A as Booking.com has scaled.
I would expect this to trend upwards in the coming years as the Priceline continues to build out its brand in new markets, coming at the expense of higher advertising costs (currently 31% of gross profit) and capital expenditures for additional infrastructure, ultimately dampening profitability in the short-term.
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