Priceline, which recently changed its name to Bookings Holdings, had a better than expected 4th quarter driven by strong room night growth. Revenue growth should continue to be robust driven by room night growth and offset slightly by declining ADR’s. They have a high-single-digit percent of the overall travel market with plenty of runway for growth as they continue to benefit from the secular tailwind of growing online travel penetration. Rising advertising costs continues to be a theme across the industry, but they are making progress on optimizing their marketing spend. Additionally, they look to add new growth channels though alternative accommodations (homes & apartments) and through booking travel experiences. The name change was to align with the leading brand Bookings.com which represents 89% of gross profit. Their portfolio also includes KAYAK, Agoda, Rentalcars.com and OpenTable.
Current Price: $2,061 Price Target: $2,400
Position Size: 2.2% TTM Performance: 20%
Thesis intact, highlights for the quarter:
- Revenues were $2.8B, +17% constant currency vs consensus $2.7B.
- Constant currency gross travel bookings were +14% for the quarter and 19% for the year.
- Room nights grew 17% to 152 million room nights for the quarter.
- For the year, room nights were up 21%, representing 116m incremental room nights.
- Average daily rates (ADRs), were down about 1% and are expected to continue to be slightly negative.
- Adjusted EBITDA was $1.1B, up 23% and above the top end of their $910m guidance.
- Adj. earnings were $16.86, which excludes $1.3B of provisional net income tax expense related to tax reform – comprised of $1.6B in repatriation tax, partly offset by a $217m income tax benefit from revaluing their deferred tax liabilities.
- 2017 FCF was $4.4 billion, up 18%, growing slightly faster than revenue.
- International provided $11.1B of their $12.4B in gross profit.
- They continue to invest in growing their supply base and marketing and are experimenting with offering in-destination experiences like museum tours.
They are working on optimizing their marketing spend:
- Marketing spend is essentially their customer acquisition cost, it’s a major portion of their operating expense and has been rising quicker than revenue.
- This is a sector wide phenomenon. Cost of performance advertising has been going up and the return on that advertising spend has been going down. Competitors are spending increasing amounts, causing BKNG to spend more to maintain brand recognition and grow traffic to their sites.
- Trying to improve ROI on their ad spend by increasing their share of direct traffic. They say this initiative is still in the early stages.
- This means shifting some ad dollars to brand advertising (like TV) vs performance marketing spend, which is mainly through search engines (primarily Google), meta-search and travel research services.
- They’re also working to improve how they measure the effectiveness of their advertising.
They are responding to Airbnb by growing alternative booking options:
- They are expanding their alternative booking options and offering them in search results alongside traditional hotels in an effort to compete with Airbnb and Expedia’s HomeAway.
- They now have an inventory of 1.2 million homes, apartments etc., up 53% YoY.
- This could be a meaningful part of their business longer term.
Valuation:
- They continue to generate solid FCF and growing FCF margins.
- Returning capital to shareholders via buybacks. They returned $1.8B in 2017 and $6B over the last 3 years. They recently increased their authorization by $8B, bringing the total authorization to $10B.
- The stock is still undervalued, trading at close to a 4.5% FCF yield.
- Stable margins going forward and mid-single digit growth, leads to a DCF valuation of about $2,400.
Thesis:
1. Priceline is a leading global online travel agent. Their global supply advantage drives a virtuous cycle: supply drives increased traffic and bookings and in turn more supply.
2. PCLN has several competitive advantages relative to Online Travel Agent (OTA) peers:
- Leading position in Europe is a structural advantage – market is highly fragmented and depends on OTAs for bookings
- They operate largely on an agency basis which allows them to continue to grow their network and do so profitably
- Strong position in China/South East Asia via Ctrip and Agoda
3. Priceline’s addressable market is growing driven by: 1.) Alternative accommodations 2.)
Increased penetration (growth of mobile/internet) 3.) Global growth of travel spend > GDP.
4. PCLN’s asset light “toll both” business model is characterized by high margins, low capital expenditures, and growing free cash flow. Free cash flow is expected to grow double digits over the next few years and I expect them to put this capital to good use via continued investment in their business and/or opportunistic returns of capital.