PCLN - Priceline Group Inc.

[xtreeq]

Thanks for the spreadsheet rishig

[LongTermView]

New CEO Named: http://fortune.com/2016/12/15/priceline-names-new-ceo/

Travel website operator Priceline Group said on Thursday that Glenn Fogel, the company’s current head of strategy has been named chief executive, effective Jan. 1.

 

Fogel replaces Jeffery Boyd, who served as the company’s interim CEO after Darren Huston’s resignation in April.

[Liberty]

Official press release:

 

http://ir.pricelinegroup.com/releasedetail.cfm?ReleaseID=1004490

 

They mention that he was "one of the primary drivers" of the Booking.com acquisition. Good to have on your resumé!

[Liberty]

Q4 is out:

 

http://files.shareholder.com/downloads/PCLN/3828646825x0x930186/174BE39C-0896-4C7D-AE5F-365D43855DCB/PCLN_Group_Earnings_Release_Q416.pdf

 

 

[KCLarkin]

I bought a fairly large position yesterday. Unfortunately, this was done at a much higher price and multiple than when I first started kicking the tires.

 

Why now? I finally got around to reading the balance sheet.

 

Priceline doesn't require working capital. In fact, it releases working capital as it grows. It requires very little CapEX. Basically, PCLN gets to grow for free. Even at modest growth rates, that ROIC is incredibly valuable. But Priceline is growing immodestly. This is very reminiscent of the Greenblatt case study on Moody's.

 

--

 

So why do I think this is mis-priced when it is at 24x earnings? Markets tend to miss the relationship between ROIC and growth. Most companies that are growing 20% per year will have modest FCF, because they need to invest in growth. PCLN converted 118% of NI to FCF last year.

 

--

There is a major drawback to PCLN. Almost all of its earnings and cash are trapped overseas. This prevents PCLN from following a sound capital allocation plan. Also, PCLN has almost no capacity to reinvest (since ROIC is so high). PCLN should payout 100% of earnings in dividends and buybacks but the U.S. tax system prevents this. Therefore, I think earnings should be valued significantly less than a similar company that is able to use capital more efficiently.

 

--

But earnings for growth companies also tend to be understated since companies need to "invest" operating expenses for growth. Priceline has enormous marketing expenses that are paid up-front. Most of the value from this marketing is earned in future quarters. If these operating expenses were better matched with revenue, profits would be much higher.

 

--

Valuation:

- I assume no multiple expansion. Some multiple compression is likely.

- Earnings yield: 4%

- LT Growth: 10%

- Expected return: 14% (8-10% assuming multiple compression)

 

This is below my hurdle rate. But it is attractive compared to the market. I'm not sure if I will keep the full position but I needed to get some skin in the game to add some urgency to my analysis. My thumb-sucking so far was very costly.

 

Note: competitive and disruption risks were discussed in detail earlier in this thread. So I will not repeat. However, I think booking.com is uniquely positioned to resist these risks. And the overall secular tailwinds neutralize these risks, IMO. In other words, it is conceivable that PCLN gets a smaller piece of a much larger pie if AirBNB, Google, Amazon, or TRIP become OTAs.

 

Note 2: Thanks for the spreadsheet Rishig. Very helpful!

[Liberty]

I agree with pretty much everything you said, KCLarkin. Fantastic business. Even cheaper on a FCF ex-cash basis (might be able to repatriate if the law changes). The guy who's now CEO was in charge of M&A around the time of the Booking.com acquisitions, if I remember correctly...

[KCLarkin]

Even cheaper on a FCF ex-cash basis (might be able to repatriate if the law changes).

 

According to Rishig's spreadsheet, it is 21.6 EV/FCF. But I won't assign much value to the cash until repatriation is announced.

[rishig]

I bought a fairly large position yesterday. Unfortunately, this was done at a much higher price and multiple than when I first started kicking the tires.

 

Why now? I finally got around to reading the balance sheet.

 

Priceline doesn't require working capital. In fact, it releases working capital as it grows. It requires very little CapEX. Basically, PCLN gets to grow for free. Even at modest growth rates, that ROIC is incredibly valuable. But Priceline is growing immodestly. This is very reminiscent of the Greenblatt case study on Moody's.

 

--

 

So why do I think this is mis-priced when it is at 24x earnings? Markets tend to miss the relationship between ROIC and growth. Most companies that are growing 20% per year will have modest FCF, because they need to invest in growth. PCLN converted 118% of NI to FCF last year.

 

--

There is a major drawback to PCLN. Almost all of its earnings and cash are trapped overseas. This prevents PCLN from following a sound capital allocation plan. Also, PCLN has almost no capacity to reinvest (since ROIC is so high). PCLN should payout 100% of earnings in dividends and buybacks but the U.S. tax system prevents this. Therefore, I think earnings should be valued significantly less than a similar company that is able to use capital more efficiently.

 

--

But earnings for growth companies also tend to be understated since companies need to "invest" operating expenses for growth. Priceline has enormous marketing expenses that are paid up-front. Most of the value from this marketing is earned in future quarters. If these operating expenses were better matched with revenue, profits would be much higher.

 

--

Valuation:

- I assume no multiple expansion. Some multiple compression is likely.

- Earnings yield: 4%

- LT Growth: 10%

- Expected return: 14% (8-10% assuming multiple compression)

 

This is below my hurdle rate. But it is attractive compared to the market. I'm not sure if I will keep the full position but I needed to get some skin in the game to add some urgency to my analysis. My thumb-sucking so far was very costly.

 

Note: competitive and disruption risks were discussed in detail earlier in this thread. So I will not repeat. However, I think booking.com is uniquely positioned to resist these risks. And the overall secular tailwinds neutralize these risks, IMO. In other words, it is conceivable that PCLN gets a smaller piece of a much larger pie if AirBNB, Google, Amazon, or TRIP become OTAs.

 

Note 2: Thanks for the spreadsheet Rishig. Very helpful!

 

Thanks KCLarkin.

 

On competitive landscape, we have talked about this before. I'll add my short summary. One big thing that is easy to miss is how difficult it is for a multi-sided platform to get to critical mass. The first level thinking is that if I can get enough customers on my platform then hotels would follow or vice versa. In reality, it is not as simple as this.

 

When one is building a platform that can benefit from network effects, one has to follow a zig-zag strategy - get some customers and get some hotels in a narrow market, get them to interact, then broaden the reach, get more customers and hotels, get them to interact and so on. Without this, there is a problem of "liquidity" - there are lots of customers but no hotels, customers eventually leave or stop interacting with the platform. That's why tracking signups is not enough. It is instructive to study how OpenTable almost was on its knees as it was building its network, until a new CEO came in and took a deep and narrow strategy. Zuckerberg did the same when it started with colleges.

 

Sometimes even a zig-zag focused strategy is enough. Look at how Paytm in India (backed by Alibaba) is building its network. It is massively subsidizing the customers to use Paytm. This is absolutely the right approach. In the eyes of traditional businesses, this is insane, but you need to solve the chicken-and-egg problem to get customers interacting with the vendors signed and create a perpetual loop. Once the network is established, these subsidies will very likely go down (similar to Alipay).

 

What Trip reallly needs to do is the same. Not only sign up the hotels (which they are doing) but massively incentivize their customer base to do direct booking. This would mean a lot of short to medium term pain for a reward that is huge at the end. They are doing some, but not enough. Obviously, this would be very bad for the stock price in the short-term. Having heard their calls and being a user of Trip, I don't see it yet. Also, I am not sure if their board would allow such a pain. Trip isn't an Amazon run by Jeff Bezos that is willing to absolutely give up the short and medium term for the long term, as far as I can tell.

[Jurgis]

What about EXPE/LEXEA vs PCLN? Is PCLN just best in show?

[Liberty]

What about EXPE/LEXEA vs PCLN? Is PCLN just best in show?

 

Market dynamic very different in US and ROW (esp. Europe). I believe this is discussed earlier in this thread.

[KCLarkin]

What about EXPE/LEXEA vs PCLN? Is PCLN just best in show?

 

Yes, I won't rehash this as it was discussed earlier. But the key thing is that Priceline is strongest in Europe, where the hotel industry is very fragmented. Expedia is strongest in the US, where chain hotels dominate.

 

The network effects that Rishig mentions are much more powerful for Priceline. Also, the relative power between hotels and OTA is much stronger for Priceline, since Priceline aggregates many smaller hotels.

 

I don't follow Expedia closely but I think Priceline is also much stronger in emerging markets (especially China) where growth is highest.

[Jurgis]

Thanks for recap.

[KCLarkin]

That isn't to say that Priceline is a better investment. Just that I feel more comfortable that I can understand the business.

[Jurgis]

That isn't to say that Priceline is a better investment. Just that I feel more comfortable that I can understand the business.

 

Yeah, I understand what you are saying.  8)

 

Good luck.

[KCLarkin]

This is below my hurdle rate. But it is attractive compared to the market. I'm not sure if I will keep the full position but I needed to get some skin in the game to add some urgency to my analysis. My thumb-sucking so far was very costly.

 

I've decided to cut my position and wait for a better entry point.

[Jurgis]

This is below my hurdle rate. But it is attractive compared to the market. I'm not sure if I will keep the full position but I needed to get some skin in the game to add some urgency to my analysis. My thumb-sucking so far was very costly.

 

I've decided to cut my position and wait for a better entry point.

 

Yeah, it's not cheap.

[Liberty]

A business growing organically at that rate, with that ROIC, requiring basically no capital to grow, with disciplined management that is shareholder friendly, with a long-term secular tailwind, with a dual-sided market moat... IMO it's not expensive at the current price. Not as cheap as it was recently, but not expensive.

[KCLarkin]

A business growing organically at that rate, with that ROIC, requiring basically no capital to grow, with disciplined management that is shareholder friendly, with a long-term secular tailwind, with a dual-sided market moat... IMO it's not expensive at the current price. Not as cheap as it was recently, but not expensive.

 

Well said.

[KCLarkin]

“Booking, on the other hand, is a global brand and in hotels, they are just so far ahead of anybody else,” Sun says. “I think it will be very difficult for anybody to come to close to them. Ctrip can do well because we focus on the Asia region and we also provide such a comprehensive product suite to the customers, which neither Booking nor Expedia does.”

 

Haven't read it yet, but this interview with Ctrip's looks interesting:

https://skift.com/2017/03/13/ceo-interview-ctrips-strategic-threat-to-expedia-priceline-and-everyone-else/?utm_content=50690282&utm_medium=social&utm_source=twitter

 

 

[Liberty]

Q1:

 

http://files.shareholder.com/downloads/PCLN/4442941726x0x941969/A9B700F9-67E5-4D04-B85E-47AEEADBA3BF/PCLN_Group_Earnings_Release_Q117.pdf

 

 

[rishig]

TTM EPS of $63.8. Cash, marketable securities and long-term investments, net of debt is $164. Post announcement stock is at $1845. P/E, adjusted, is 26x.

 

10 year spreadsheet with quarterly data:

https://docs.google.com/spreadsheets/d/11XzvbPSE8JSyFW3p-4t_nVa-_rjTqoFL9LKAUieKIaA/edit#gid=976035664

[Liberty]

https://skift.com/2017/05/25/the-direct-booking-war-is-a-myth-at-least-in-europe/

[fareastwarriors]

For Hotels, There’s No Room Left for Online Travel Agencies

Major chains launch marketing campaigns to woo customers away from Expedia, Priceline

 

 

https://www.wsj.com/articles/for-hotels-theres-no-room-left-for-online-travel-agencies-1495974698

[LongTermView]

Looking at some notable hotel related apps at https://www.appannie.com/en/apps/ios/top/united-kingdom/travel/iphone/, we see some of the things discussed in this thread.

 

Hotel chains like Hilton, Marriott and Choice are more powerful in the U.S. than the UK.

 

I don't understand what Google Trips is or what it aims to be but it has a ways to go to get towards the top of these lists.

 

UK iOS:

  #4 Booking.com

  #7 TripAdvisor

  #8 Airbnb

#19 trivago

#22 Expedia Hotels

#34 Hotels.com [Expedia]

#45 HomeAway [Expedia]

 

UK Google Play:

  #1 Booking.com

  #5 Airbnb

  #6 TripAdvisor

  #9 trivago

#25 Expedia

#28 Hotels.com [Expedia]

#35 HomeAway [Expedia]

#49 Google Trips

 

U.S. iOS:

  #4 Airbnb

  #9 Booking.com

#14 Expedia

#15 HomeAway [Expedia]

#19 TripAdvisor

#20 HotelTonight

#23 Hilton

#24 Hotels.com [Expedia]

#25 Marriott

#30 trivago

#34 Priceline Hotel

#46 Travelocity [Expedia]

#49 Google Trips

 

U.S. Google Play:

  #3 Booking.com

  #4 Airbnb

  #8 Expedia Hotels

#10 trivago

#13 Hotels.com [Expedia]

#14 HomeAway [Expedia]

#19 Hilton

#24 Marriott

#25 TripAdvisor

#26 Travelocity [Expedia]

#27 HotelTonight

#28 Google Trips

#38 Priceline Hotel

#47 Choice Hotels

 

[giofranchi]

I have opened a position in PCLN.

The travel booking market is very large at $1.4 trillion and only 40% of it is online. This makes me believe a lot of growth might still be in store for the next 5-10 years.

And PCLN surely is the market leader.

 

What do people here think about the threat of larger players like AMZN and FB entering the travel booking market and driving margins down?

 

Cheers,

 

Gio