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Priceline.com Flies High

Source:BusinessWeek.com Author:Ben Steverman Date:03/25/14 Click:

A weak economy, it is assumed, will cause consumers to cut back on their travel spending. Not if the price is right. Just look at Priceline.com (PCLN), which reported a 62% jump in global bookings in the past year to $1.2 billion, while revenue rose 29% and profits surged 136%.

These fourth quarter results shocked investors, who have sent Priceline's stock 20% higher since the company announced them Feb. 14. On Feb. 19, the shares touched a new 52-week high of 125.73, before settling at 122.61. During the past year, the stock has climbed 138%.

Price-conscious customers seem to be attracted by Priceline's reputation for discount prices, and its "Name Your Own Price" pricing method.

"We believe our brands and services are particularly attractive to customers and suppliers in times of economic stress, and results over the past few months bear out that thesis," president and chief executive Jeffrey Boyd told analysts recently. Priceline operates Priceline.com, Booking.com and Asian hotel site Agoda.com, along with several other sites.

Despite the growing evidence of economic weakness, Priceline's U.S. bookings in the fourth quarter rose 24% from a year ago, up from 19% the previous quarter. Customers were drawn to the site by Priceline's decision to eliminate airline ticket fees, but execs said the growth came from all products. "Our fourth quarter results do not reflect a significant slowdown — quite the contrary," Boyd said.

But the U.S. is only a small part of Priceline's growth as the site catches on overseas, particularly in Europe. International bookings soared 109% from the year before. Analysts also praised management's ability to keep expenses in check, which widened profit margins. Priceline's fourth quarter operating profit margin of 16.6% compared with a margin of 9.1% a year ago.

The question is, can Priceline keep this up, especially if the economy keeps weakening?

Goldman Sachs (GS) analyst Jennifer Watson notes that Priceline’s sites provide "both consumers and suppliers a superior value proposition during economic uncertainty." The sites are "a destination for consumers looking for savings," she wrote, while hotels, airlines and other travel providers are also more likely to use the sites to unload their excess inventory.

Priceline’s "Name Your Own Price" feature is opaque, meaning that consumers don't know which hotel or airline they're booking. This helps operators attract customers without revealing those discounts to other, more traditional customers. As Stifel Nicolaus (SF) analyst George Askew put it: "Travel suppliers are offering attractive inventory at attractive prices to [Priceline] as the economy slows."

At the same time, Priceline is stealing market share from competitors, especially travel agencies.

Both analysts and executives warn that Priceline could still feel the pinch of tough economic times. But Priceline executives said signs of weakness haven't shown up in results so far this year.

There are other reasons for investors to be concerned. Inevitably, international growth will slow, executives admit, because it will be impossible to keep growing above 100% year after year. Also, the number of Priceline shares outstanding has grown quickly in recent years, due to stock-based compensation and the conversion of debt into equity shares. That helps dilute the value of all existing shares.

What’s more, Priceline's strength is fully reflected in its stock price, warns Stifel's Askew. "We choose to remain on the sidelines for now," wrote Askew, who has a hold opinion on the stock.

Piper Jaffray (PJC) analyst Aaron Kessler, however, sees Priceline's valuation as "attractive," and he has a price target of 147. He lists positive factors for the stock, including strong growth internationally; improving growth in the U.S. and a "solid record of management execution."

If the economic slowdown is shorter and shallower than many expect, Priceline will undoubtedly continue its robust growth. Even if the economic slowdown is significant, Priceline could prosper by stealing business from pricier competitors and continuing its strong international growth.

But if the recession is deep and spreads abroad, Priceline could face turbulence. Even the strongest and fastest-growing tourism company will find it difficult to prosper if worried consumers aren’t in the mood to travel.

Steverman is a reporter for BusinessWeek's Investing channel.

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