Priceline: A Growth Powerhouse – Forecast Profits and/or Cash Flow Not Prices!

Introduction

This is the second in a series of articles where I will cover popular and/or high profile stocks. The primary objective of this series will be to put a spotlight on the importance of forecasting future growth prior to making an investment decision. The central idea is to determine whether or not a reasonable forecast of future growth warrants consideration for investment relative to how the market is currently valuing a given stock.

Priceline: The Dominant Worldwide Player in the Growing Leisure Travel Industry

The following excerpt from a report by Morningstar senior equity analysts Dan Wasjolek illustrates Priceline’s industry dominance:

“On June 30, 2017, Priceline had around 600,000 traditional hotel properties on its network, which compares with Expedia’s 375,000 at the end of its June quarter. On the demand side, Priceline was a top-five travel mobile application in 68 countries, versus two and 18 for Expedia and TripAdvisor, respectively (on Aug. 8, 2017, according to App Annie). Also on the demand side, customers booked 170 million room nights through Priceline in the second quarter of 2017 versus 80 million on Expedia brands.”

Forecasting is the Key

One of the most important investment principles is the undeniable relationship between earnings and/or cash flow growth and long-term shareholder returns. After literally examining thousands of fundamental graphs, I can confidently state that the profit and/or cash flow growth of each respective company are the most critical drivers of returns. Valuation plays a major role; however, it is the rate of change of earnings and/or cash flow growth that matters most of all. Therefore, it only logically follows that the key to success is forecasting earnings and/or cash flows.

The good news is that calculating the prospects of a well-run business’ growth potential can be accomplished with enough accuracy to be relied upon. Guessing how short-term stock prices may behave is an exercise in futility. Think hard about the implications of this. Investors everywhere are obsessed with forecasting stock prices, a task that is impossible to accomplish, yet they tirelessly persist. No matter how often they are proven wrong, they continue on. Yet ironically, the easier and more rational approach is hiding in plain sight. Fundamental analysis may seem harder, yet in truth, it is not. The hard part is exercising the patience and trust to allow the results to manifest as they must inevitably do. Instant gratification is not a promise of sound long- long-term investing.

In part 1 of this series found here I elaborated on the importance of forecasting and suggested possible approaches that investors could implement.

FAST Graphs Fundamental Preview on Priceline: Forecasting Earnings And/Or Cash Flows

Since a picture’s worth 1,000 words, and a video worth many more, I offer the following FAST Graphs fundamental analysis on Priceline (PCLN) with a focus on forecasting. This is the second in a series of videos I plan to offer on high profile and popular stocks:

Source: F.A.S.T. Graphs Video

Summary and Conclusions

Priceline is a powerful growth stock that is likely to continue growing at high double-digit rates for the foreseeable future.  Consequently, odds are if you hold the stock long enough, you’re likely to earn a long-term profit on your investment.  Furthermore, Priceline is currently commanding a premium multiple of earnings and cash flows relative to its historical norm.  On the other hand, it is not excessively valued relative to its above-average long-term growth potential.  Nevertheless, I would like to see it a little cheaper before I personally became interested in investing.

Morningstar typically concludes their analyst reports with a short summary of pros and cons.  In my opinion, the pros on Priceline outweigh the cons as follows:

Bulls Say

Outsize online travel bookings growth witnessed the past few years in China and emerging markets will continue over the next 10 years, given low penetration levels and increased online usage, and Priceline is positioned well to benefit.

Mobile application usage is increasing rapidly, and Priceline has a dominant global position. Mobile has reached around 40% of total bookings.

Priceline is strengthening its network effect through both organic and inorganic initiatives and in fast-growing vertical markets like in-destination and vacation rentals

Bears Say

Competition from existing and new entrants could meaningfully affect Priceline’s growth outlook, although we do not view TripAdvisor’s Instant Booking initiative or Expedia’s recent acquisitions as a large threat to Priceline sustaining its network advantage.

Priceline gets a large percentage of bookings from Europe (we estimate 50%-55% of total), which could be nearing a more mature growth phase relative to emerging markets.

The full removal of rate parity clauses could introduce competition among players, resulting in margin pressure. We view this risk as being manageable.”

In closing, the primary objective of this series of articles is to illustrate the importance of forecasting earnings and/or cash flows on any stock prior to investing.  To my way of thinking, this is the only way to make a realistic assessment of your opportunities as well as your risks.

Disclosure: No position at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.

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