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The George V hotel in Paris: Outside North America, Priceline.com drops its name-your-own-price model and uses a traditional booking model that has allowed it to become the world’s biggest seller of hotel rooms. (REMY DE LA MAUVINIERE/AP)
The George V hotel in Paris: Outside North America, Priceline.com drops its name-your-own-price model and uses a traditional booking model that has allowed it to become the world’s biggest seller of hotel rooms. (REMY DE LA MAUVINIERE/AP)

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Priceline: high-flying growth, down-to-earth valuation Add to ...

As a consumer of online travel services, I’ve never been fond of Priceline.com's "name-your-own-price” bidding system, instead preferring to take what’s offered me on other sites. That means when I think of Priceline, I think of spokesman William Shatner crashing through walls or singing Young MC’s Bust A Move.

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So I was surprised recently to learn that Priceline.com Inc. stock has busted a move to the top of the growth-stock charts with a 10-year return of nearly 1,400 per cent (and almost 600 per cent of that coming in the last three years.) The other major North American online travel agencies, Expedia Inc. and Orbitz Worldwide Inc., have been left in the dust.

Have Priceline’s competitors learned their lessons, with their own high-flying growth strategies to follow? While a case can be made for both Expedia and Orbitz, uncertainties abound, suggesting investors in the sector may not be taking a pleasure trip.

To Canadians and Americans, the secret to Priceline.com’s success may not be evident from watching Mr. Shatner’s mugging as the “Priceline Negotiator.” One key is that outside North America, the company drops its name-your-own-price model and uses a traditional booking model that has allowed it to become the world’s biggest seller of hotel rooms.

In the last four quarters, year-over-year revenue growth has accelerated from 35 per cent to 45 per cent, with earnings per share doubling, year-over-year, in each of the last two quarters. At a market capitalization of nearly $24-billion (U.S.), Norwalk, Conn.-based Priceline has become one of the largest U.S. Internet companies.

“Understandably, people are going to think of these companies similarly because they’re doing a lot of the same things, but the drivers are very different,” says Scott Kessler, an S&P equity analyst. “Europe and hotels really drive what’s going on at Priceline, while Expedia is a lot more diversified in terms of its brands, businesses and geographies. Orbitz is a much smaller company, focused more on the U.S. and airlines than the other two.”

How much smaller? Chicago-based Orbitz, with a market cap of less than $400-million, is one-sixtieth the size of Priceline. Orbitz has been hurt by an emphasis on the slower-growing U.S. (75 per cent of revenue) and airlines (35 per cent), since selling airline tickets offers less-favourable booking terms for online travel agents than hotel rooms do. As a result, Orbitz has posted years of annual losses, and revenues in the last 12 months that are below 2007 levels.

Bulls believe Orbitz, which has doubled from its 52-week low but is still down for the year, is showing signs of successfully diversifying in to higher-growth markets; skeptics note that in a business where scale matters, Orbitz may be too far behind to catch up.

Bellevue, Wash.-based Expedia, at $3.8-billion in revenue, is only a few hundred million dollars in sales behind Priceline, but its less-favourable mix of sales, and resulting smaller margins, make it less profitable. And its revenue growth is in the mere teens, compared to Priceline’s more vigorous numbers.

The company’s plan to please investors involved spinning off TripAdvisor, a site packed with user-generated reviews of hotels, restaurants and attractions around the world. The split was completed last week, but thoughts that the deal would speedily “unlock shareholder value,” as they say, were unfounded: A drop in TripAdvisor’s price means the two parts now trade for less than the old whole.

This is a buying opportunity, say those who think Expedia is well-positioned to expand its overseas hotel-booking business with better Web platforms for customer interaction and a growing inventory of available rooms. “The company is fully participating in global online hotel growth,” says Mark Mahaney of Citigroup Global Markets Inc., who has a “buy” rating on the stock.

Looming over all of this, however, is Google Generally, I’m not a big fan of the “sell” cases built on “(insert company here) will be destroyed if Google (or Apple, or Amazon, et al.) decides to become a player.”

However, Google’s intentions to build its travel-search capability are unquestioned. “Over the past several months,” Macquarie Capital Inc. analyst Tom White wrote this fall, “Google has made more meaningful changes to the way it displays travel-related information than it has made in the past decade.” (Mr. White has a “neutral” rating on Expedia.)

While Google doesn’t seem to want to handle transactions directly, as the online travel agencies do, it seems quite happy to send consumers directly to the airlines and hotels, cutting out the Pricelines, Expedias and Orbitzes of the world.

If you believe the Google threat isn’t as great as some suppose, and you want to participate in the long-term trend of travel bookings going online all across the globe, well, we return to Priceline. Despite its gargantuan returns, it’s trading at about 16 times both its forward earnings and its forward cash flow, says Standard & Poor’s Capital IQ, not a bad price for a company that’s doubled its earnings per share in the last year.

You may not be able to name your own price for the shares, but contrary to Mr. Shatner’s suggestions, sometimes the stated amount is a good price to pay.

 
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