Cheap Travel, Pricey Stock

STOCK WATCH Cheap Travel, Pricey Stock

The company should beat analyst expectations when it announces quarterly results May 8, but the stock is no bargain. is running full-steam ahead. The online travel agency has developed impressive European operations, expanded rapidly to Asia, and should gain more business in U.S. from budget travelers -- squeezed by high energy prices and the credit crunch -- because of the company's innovative "Name Your Own Price" service.

All of these factors may help Priceline beat profit forecasts when it reports first-quarter results May 8. Moreover, rival online travel agency Expedia bested the average of analysts' estimates by a penny per share when it posted its first-quarter results May 1. That's a sign that Priceline is poised for a strong quarter as well. Analysts, on average, estimate that Priceline will earn 59 cents per share in the first quarter, according to Thomson Financial.

Alas, Priceline's fine prospects may already be baked into the share price. The stock (symbol PCLN), which closed at $126.70 on May 2, has gained 103% over the past year. It trades at 25 times the $5.11 per share that analysts expect the company to earn in 2008. By contrast, Expedia, which closed at $24.83, trades at 15 times estimated 2008 earnings of $1.45.

At current prices, Priceline is not compelling, says Citigroup analyst Mark Mahaney. He downgraded the stock to "hold" from "buy" on May 1. "This is primary a valuation call," he said, noting that Priceline's fundamentals were still strong.


Priceline's chief pitchman, actor William Shatner, gets a lot of attention, but Priceline's real star is its international operations.

The transition of Priceline into an international player started in 2004 when the company bought England-based Last November, Priceline acquired Agoda, an online travel company that focuses on discount hotel bookings in Asia. The company's international business represented about 55% of total bookings in 2007 and contributed more than two-thirds of gross profit (sales minus cost of goods sold).

Most of Priceline's international business comes from Europe. But the mix should change with the addition of The company expects that international operations will represent a growing percentage of bookings and profit throughout 2008 and beyond.

An emphasis on overseas travel market plays to Priceline's strengths. First, the size of the international travel market is substantially larger than that within the U.S.


Second, the growth rates of international online bookings have exceeded those of the U.S. In the fourth quarter of 2007, international bookings on Priceline grew 90% year-over-year, when you exclude the impact of foreign currency, compared with 24% for U.S. operations.

Finally, Priceline's online reservation system is more appealing to small chains and independent hotels more commonly found outside of the United States. The lodging business in Asia and Europe is fragmented compared with the business in the U.S., where large chains dominate the market. Priceline aims to be the top hotel service provider in Europe, and will try to expand services to more markets from that European base.

The overseas opportunities have not gone unnoticed. Expedia is getting more competitive in Europe because of aggressive advertising, Mahaney says. He sees clear signs of weakness in the U.K. travel market, and that increases the possibility of a slowdown in continental Europe. Such obstacles will slow Priceline's expansion in those markets.

Look for Priceline shares to run up if the company beats earnings estimates when it reports May 8. If you already own the stock, that could be a good opportunity to trim positions. If you're a long-term investor, wait for a better entry point.