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Growth AND Widening Margins: the Priceline Story

Priceline (PCLN) urges its members to “name your own price” for their holiday flights, hotel bookings and car rentals; investors in the company’s stock, however, are going to have to get used to paying a very hefty price indeed.

The latest catalyst for the surge in Priceline’s shares was the release of its better-than-expected quarterly earnings Thursday, which propelled the stock sharply higher today; by mid-morning, it was changing hands for $766.64 a share, up nearly 4%, greatly outpacing the broad market, as seen in a stock chart.

PCLN Chart

PCLN data by YCharts

Cantor Fitzgerald analyst Naved Khan reiterated his stock price target of $800 on Priceline’s shares. That may seem aggressive, given that the stock already has rallied 23.7% so far this year, but Khan’s forecast is far from being the most ambitious. Evercore Partners and JMP Securities both have established a target of $850 a share; while Ascendiant Capital, which has just initiated coverage of Priceline, did so with a target of $870 a share.

But delving a little more deeply into analysts’ views of Priceline reveals a bit of ambivalence: while a majority of those analysts with an opinion recommend buying or maintaining an overweight position in the stock, of those who have been following the stock longer, half have upgraded their recommendations, while the other half have downgraded their ratings. Deutsche Bank, for instance, shifted its recommendation from a ‘buy’ to ‘hold’ in mid-April.

What may be causing them some anxiety is that every dollar of additional profit at Priceline may be harder to obtain. The travel booking business is a hyper-competitive one, and as the geographic focus of that competition and future growth shifts away from Europe and North America and into Asia and Latin America, Priceline may have less of an edge over its rivals. Admittedly, Priceline has done very well in Europe, snapping up Booking.com, a European online agency, back in 2005 for what now seems to be the bargain basement price of $240 million when fewer than a quarter of Europe’s travelers booked their vacations online. That figure is now nearly 40%, by some estimates, and Priceline is thriving as a result – especially since it is the biggest player in the hotel business, where bookings command higher commissions. Expedia (EXPE) is Priceline’s clear rival – a large and threatening one – while Orbitz Worldwide (OWW) and TripAdvisor (TRIP) are trying to catch up.

PCLN Revenue Annual Chart

PCLN Revenue Annual data by YCharts

Some analysts, like Roger King at CreditSights, take a wary view of the amount of spending required to sustain Priceline’s growth. A recent Barron’s article was similarly skeptical, with the author noting that the company’s spending on online marketing tools (buying search terms, like "Hong Kong hotel," basically) trebled in the last three years; that certainly makes Google (GOOG) happy.. But it is worth remarking that while Priceline’s SG&A expenses have grown more rapidly than its revenue over the last five years, its gross profit margins and its net income have grown far more rapidly still. Priceline is a productivity machine, widening its margins as it grows, the opposite of Amazon (AMZN) discouraging model.

PCLN Profit Margin Quarterly Chart

PCLN Profit Margin Quarterly data by YCharts

Still, it is worth wondering, on a relative basis, given its PE ratio, whether Priceline is the only stock to own as a play on growth in the online travel booking business. And certainly, when a company has fared as well as Priceline has in recent quarters, it gets harder to over-deliver to investors and be rewarded with a big gain, and easier to fall short on one metric or another.

PCLN Forward PE Ratio Chart

PCLN Forward PE Ratio data by YCharts

Just ask Apple (AAPL) about the perils of high expectations . . .

But while rival Expedia’s rate of annual revenue growth is climbing, it still falls short of the level recorded by Priceline, which may offset some of the valuation concerns or anxiety about the level of vulnerability to competition on the part of the latter. While Priceline’s big gains and high relative valuation may mean there is more risk of volatility or an unpleasant surprise knocking some of the stuffing out of the stock, it seems to be too early to cut and run just now.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.

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