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Priceline is the industry giant. It does more business than Expedia, and has significantly higher profit margins (MUHAMMED MUHEISEN/AP)
Priceline is the industry giant. It does more business than Expedia, and has significantly higher profit margins (MUHAMMED MUHEISEN/AP)

STRATEGY LAB

Priceline: Just the ticket for growth investors Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

It’s always nice when a stock goes up right after you buy it. I added shares of Priceline.com Inc. to my model Strategy Lab portfolio in December and they’ve already risen 11 per cent.

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Gratifying, to be sure. But since I’m not a trader, I’m much more interested in the long-term outlook for the company than its recent share price history.

That’s why I was eager to peruse the most recent quarterly results for the purveyor of online bookings for flights, hotels and car rentals. As a growth investor, I want to know how the underlying business is doing. If a company is building a solid foundation for future success, I figure the share price will take care of itself.

I’m happy to say that things are looking just fine for Priceline. In fact, I think there’s a lot of growth left in this story.

First, the numbers: In its fourth quarter, the company brought in $6.6-billion (U.S.) in total travel bookings, a whopping 33-per-cent increase from a year earlier. Gross profit was up 30 per cent, year over year.

Any way you slice it, this is exceptional growth. And much of that growth is occurring internationally. Outside of its domestic U.S. market, Priceline saw a 43-per-cent increase in bookings.

Considering the worries about the macro economy in Europe, I think those results speak volumes. I’m happy knowing that Priceline is a globally diversified giant in an important, emerging industry.

If there’s any tiny flaw in these results, it’s that Priceline’s earnings per share came in at $6.77. That was a 26-per-cent increase year over year, but not quite as strong as the gross profit increase of 30 per cent.

The discrepancy appears to be the result of increased expenses for online advertising. Priceline gets a lot of its web traffic by paying for it. And pay it did. A quick look at the income statement tells me that expenses for online advertising were up about 40 per cent, year over year.

Those online ad expenses may remain elevated for some time, given that Priceline appears to be in a battle for market share with No. 2 player, Expedia. I’m not too worried, though.

Priceline is the industry giant. It does more business than Expedia, and it has significantly higher profit margins. That’s why its market capitalization is about four times higher than Expedia’s. If the two want to get into a brawl, Priceline packs a much bigger punch.

In addition, I think of risk in the context of my entire Strategy Lab portfolio. Who wins from an online spending battle? Google, which dominates the online advertising business, and is also a key part of my model portfolio.

I like Priceline’s future prospects. It is well known for its “name your own price” business model in the U.S. market, but it’s the company’s lesser known brands that are driving its growth. Booking.com (which handles hotel reservations) and Rentalcars.com (which does what its name implies) appear to be gaining traction.

The acquisition of its U.S. competitor Kayak.com, another travel search site, should boost Priceline’s scale and give it a stronger presence in the mobile market. Kayak’s mobile app had been downloaded over 20 million times as of October, 2012. I think mobile users are a smart audience worth going after.

And let’s not forget Asia, where Priceline owns Agoda.com, a hotel reservation service that specializes in the Asia Pacific region. Management won’t disclose sales numbers, but they say the region is growing faster than the overall business.

What about valuation? S&P Capital IQ shows that analysts expect Priceline to generate share profit of $38.60 this calendar year. Based on that, the stock trades at a very reasonable 18 times earnings.

Given Priceline’s enormous growth prospects, its No. 1 position in its industry and its reasonable valuation, I can’t see myself selling any time soon.

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