stock analysis: priceline
TRANSCRIPT
Stock AnalysisKara Stessl
1
Agenda
Overview Quality Growth Momentum Valuation
Overview
•Business
•Industry
•Management
•Financial
Quality
•Historical
•Expected
Growth
•Price
•Earnings
Momentum
•Intrinsic
•Analyst Comparison
Valuation
Target Price
Summary
2
Overview Quality Growth Momentum Valuation
Business DescriptionHistory Industry
Fast Facts
• Founded 1997 by Jay S. Walker
• Headquartered in Norwalk, CT
• Went public in March 1999
• Online travel company
• “Name your own price.” feature
• Dot-com bubble trouble
• Listed on the NASDAQ Exchange
• IWF Ranking: 50
• Market Cap: $59.7+ billion
• Current Price: $1206.21
• Shares Out: 52,448,000
• 52 Week Range: $1017.12 - 1378.96
• Market share: 4% global travel
bookings
Consumer Discretionary
Online Travel Agency
3
Data from Factset
Price History
Overview Quality Growth Momentum Valuation
Business Description4
Data from Priceline 10-K 2013
Overview Quality Growth Momentum Valuation
THE PRICELINE GROUP
5
Overview Quality Growth Momentum Valuation
Business Description6
Data from Priceline 10-K 2013
• Priceline buys product and resells to customer
• Mark-up around 20%
• Customers pay when they book
Merchant Model
• Merchants pay Priceline a fee of 12-15%
• COGS virtually non-existant
• Accounts for ~2/3 of revenue
• Booking.com main revenue driver
Agency Model
Merchant
Agency
* % of 2013 Revenue
Other
Overview Quality Growth Momentum Valuation
Business Description7
Data from Priceline 10-K 2013
Overview Quality Growth Momentum Valuation
Business Description8
Data from Priceline 10-K 2013
Overview Quality Growth Momentum Valuation
Business Quality9
Competitive Advantage
Network Effects
Once a network of service providers is in place, the customers
tend to come, attracting more service providers, which should attract more customers
International Markets
Priceline Established
International Leader
Expedia and other competitors would
have to invest heavily just to catch
up to Priceline’s current position
Strategic Alliances
Ctrip
Financial and strategic alliance. China poised to surpass US as largest business travel market
this year.
Overview Quality Growth Momentum Valuation
Business Quality10
Overview Quality Growth Momentum Valuation
Management Quality
1994 -1998: Engagement Manager
1998 – 2003: SVP Branded Projects and New Ventures
2003 – 2005: VP US Small MM Solutions and Partners
2005 – 2008: CEO Microsoft Japan
2008 – 2011: VP Global Consumer & Online
2011 – Present: CEO Booking.com
2014 – Present: CEO Priceline GroupDarren Huston
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Data from LinkedIn
Overview Quality Growth Momentum Valuation
Industry Analysis
Entrants
• Medium: current and new competitors can launch new
sites at a relatively low cost
Substitutes
• Low: offline travel agents or directly with suppliers, often more costly
Suppliers• Medium: can choose other online sites to sell excess inventory
Customers
• High: looking for bargains, willing to switch for lower prices, search engines allow maximum comparability
Rivalry• Highly competitive industry: competing mainly on price
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Overview Quality Growth Momentum Valuation
Financial Quality: Profitability and Liquidity
13
Data from Factset
Overview Quality Growth Momentum Valuation
Financial Quality: Profitability Peers
0
10
20
30
40
50
60
70
80
Gross
Margin %
Operating
Margin %
Net
Margin %
ROA ROE
Priceline
Expedia
Orbitz
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Data from Factset
Overview Quality Growth Momentum Valuation
Financial Quality: Dupont Analysis
0
10
20
30
40
50
60
70
Asset
Turnover
Operating
Margin
Interest
Burden
Tax Burden ROA Equity
Leverage
ROE
Priceline
Expedia
Orbitz
15
Data from Factset
Overview Quality Growth Momentum Valuation
Historical16
Data from Factset
Overview Quality Growth Momentum Valuation
FCF Growth
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Data from Carlson Wagonlit Travel and Statista
$0
$500
$1,000
$1,500
$2,000
$2,500
(millions)
Overview Quality Growth Momentum Valuation
Expected18
Data from Factset
Overview Quality Growth Momentum Valuation
Opportunities
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OpentableAcquisition
Growing at 18%
Potential synergies, immediately accretive ,
Booking.comreaching out to existing suppliers
Dominantly based in US – Priceline has capability to take
worldwide
Successful history with past
acquisitions
Rising Agency Sales
No inventory risk,
Spread fixed costs across growing revenue base = better margins
Popular in international
markets
Growing International
Market
Asia and Latin American markets expected to grow
substantially
Mobile bookings to catalyze growth
Higher growing consumer
discretionary budget in Asia
Increased online penetration of travel bookings
Ctrip Partnership
$0.5 billion invested in Ctrip partnership,
reserves right to increase stake
China is world’s biggest outbound travel market; only 15% travel booked
online
Booking.com will advertise Ctrip's
inventory of hotels in China.
Ctrip will be able to offer its users a
wider array of deals from Priceline's
platforms
Overview Quality Growth Momentum Valuation
Economic Impacts
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35.90%
37.10%
38.90%
40.40%
42.30%
44.20%
46.20%
2010
2011
2012
2013
2014
2015
2016
Percentage of Worldwide Online
Travel Sales
309
340
374
408
446
483
523
2010
2011
2012
2013
2014
2015
2016
Worldwide Online Travel Sales
Volume
Data from Barclays and Statista
($ billions)
Overview Quality Growth Momentum Valuation
Online International Travel Sales Volume
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Data from Barclays and Statista
0
50
100
150
200
250
300
350
400
2010 2011 2012 2013 2014 2015 2016
Europe Asia Pacific Latin America ($ billions)
Overview Quality Growth Momentum Valuation
Economic Impacts: Catalyst
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Overview Quality Growth Momentum Valuation
Risks and Concerns
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Threat of business disruption
•Google licensing deal with Room 77 software
•Apple iTravel patent app
•Facebook?
Supplier Dependence
•Broad hotel, rental car, airlines, etc. selection necessary to remain competitive
Unpredictable Global Events
•Ebola, SARS, and other epidemics
•Terrorism
•Natural Disasters: Katrina, Icelandic Volcanic Eruption, etc
Global Growth Slowing
•Consumer Discretionary, luxury expense
Strength of US Dollar
•Majority of revenue derived from international operations
Security Concerns
•Personal information
•Credit information
•Security breaches
Consumer Preferences
•Seasonality: highest profitability quarters 2 and 3;
• US Opaque reservations becoming more competitive
Overview Quality Growth Momentum Valuation
Momentum: Price (10 years)
24
Data from Factset
Overview Quality Growth Momentum Valuation
Momentum: Price (5 years)
25
Data from Factset
0
100
200
300
400
500
600
700
800
H22009
H12010
H22010
H12011
H22011
H12012
H22012
H12013
H22013
H12014
H22014
(INDEX) Priceline Group Inc - Price (INDEX) S&P 500 - Price
(INDEX) MSCI The World Index - Price (INDEX) MSCI AC World / Consumer Discretionary -SEC - Price
Priceline Group Inc
1138.43 0.00 0.00% 4:00:00 PM VWAP: High: 1378.96 Low: 154.12 Chg: 542.67%
Overview Quality Growth Momentum Valuation
Earnings Surprises
26
Data from Factset
Overview Quality Growth Momentum Valuation
Valuation: DCF
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TerminalValueMatrix
Growth
Rate 2.0% 2.5% 3.0% 3.5% 4.0%
WACC
10.62% 120,840 128,279 136,694 146,290 157,335
11.12% 114,217 120,840 128,279 136,694 146,290
11.62% 108,282 114,217 120,840 128,279 136,694
12.12% 102,933 108,282 114,217 120,840 128,279
12.62% 98,088 102,933 108,282 114,217 120,840
EquityValuePerShareMatrix
Growth
Rate 2.0% 2.5% 3.0% 3.5% 4.0%
WACC
10.62% 1,558.22 1,613.96 1,677.03 1,748.94 1,831.72
11.12% 1,457.99 1,505.60 1,559.07 1,619.56 1,688.54
11.62% 1,368.58 1,409.51 1,455.18 1,506.48 1,564.50
12.12% 1,288.37 1,323.76 1,363.03 1,406.85 1,456.07
12.62% 1,216.05 1,246.81 1,280.77 1,318.46 1,360.51
Overview Quality Growth Momentum Valuation
Recommendation: Analysts
28
Analyst Ratings
Buy 23
Hold 4
Sell 0
Analyst Return Estimates
12m Target Price $1488.08
Last Price $1206.21
Return Potential 23.37%
Range $1250 - 1600
Data from Factset
Overview Quality Growth Momentum Valuation
Recommendation
29
STRONG BUY
• My Target Price: $1455.18
• Analyst Target Price: $1488.08
• Current Price: $1206.21
• Return: 20.64%
Overview Quality Growth Momentum Valuation
Questions?
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