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Online travel stocks are great businesses. Which one should you own for the long term?
The days of travel agents are long gone. Once the internet truly exploded, their days were numbered. Then The Priceline Group (NASDAQ:PCLN) disrupted the market with its Name Your Own Price concept, and the deal was done.
Not that online travel businesses didn’t have their tough times. Priceline almost went under after the internet bubble burst and even effected a 1:6 reverse split. However, as the internet matured, technology improved, and these businesses reached economies of scale, they became outstanding companies.
The disruptive model, which was soon emulated by Hotwire.com, became a great way for hotels, airlines, and rental cars to market their perishable inventory. Better to sell a room for half price or even less than get zero for that night. Even better, these vendors didn’t’ have to lower prices through their other sales channels.
This sales approach became so popular that websites have turned up that offer guidance as to the name of a vendor in the opaque market, by using the information Priceline and Hotwire provide to pinpoint the vendor.
Over the years, Priceline expanded its business by making several strategic acquistions. Active Hotels was a 2004 purchase, which gave PCLN exposure to the European market. Booking.com augmented the European presence. Agoda.com was added to the portfolio, being a hotel booker for Asia, in 2007. In 2010, PCLN scooped up Rentalcars.com.
These were all good purchases, but then I got concerned. In 2012, they purchased Kayak.com for $500MM in cash and $1.3 billion in equity and options. I hated this purchase because it was effectively just buying out a competitive travel aggregator. I think PCLN overpaid for it. While having a meta-aggregator is a good idea, I didn’t see it as a terribly strategic purchase.
Then PCLN did something even worse. They dropped $2.6 billion to purchase OpenTable, the restaurant reservation service. They paid 78 times earnings and 40x cash flow for a company with 14% EPS growth. OpenTable’s $33.4 million net income for 2013 is a rounding error compared to PCLN’s $1.9 billion.
These latest moves undermine my faith in management. Despite these mis-steps, is PCLN stock a buy? Let’s first look at financials.
Net income was $41.72 per share last year, headed for $52.45 this year, and $64.86 next year. That’s 25% growth and analysis peg 5-year growth at 21%. The company has about $3 billion in cash after the OpenTable acquisition, or $60 per share.
I back that $60 out of the current price of $1,174, to give PCLN an effective price of $1,114. That gives it a P/E ratio of 21, which is right about its long term growth rate, and even a bit under its near term growth rate. I afford PCLN a premium because it is a pure cash machine. It spend less than $100MM a year on capex, and its operating cash flow keeps increasing. It was $1.3 billion in FY11 and $2.3 billion in FY13.
I think PCLN should be trading at 25x earnings, or around $1,311, and $1,625 by the end of next year. That’s much higher than the naysayers ever expected.
Next time, I’ll take a look at competitor Expedia (NASDAQ:EXPE), Sabre Corporation (NASDAQ:SABR), and Orbitz Worldwide (NASDAQ:OWW) to see if any of them can top PCLN as the online travel stock you should hold.
Lawrence Meyers does not own shares in any company mentioned.
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