The Priceline Group: Buy On A Corrective Pullback


The technology sector has been lagging the broad-based market over the past month. It seems like it may be the beginning of a corrective pullback. I dont expect a significant correction but any weakness will be a good opportunity to buy The Priceline Group (PCLN). The online travel industry is set to benefit from the positive structural changes and so this company would be an excellent play. It is the cheapest stock compared to peers and it has been delivering strong results in the history which shows no sign of slowing.


Weakness in technology sector

Over the past weeks, the technology sector showed the first sign of weakness. Nasdaq index declined from all-time high 6341 to current 6135 which is just a mere 2.9% weakness in a month. On the other hand, the broad S&P 500 index declined just 0.4%.

Source: www.finance.yahoo.com


At first glance, it may look not that significant. But the important thing is that it is the first time over the past 12 months. Nasdaq outperformed broad-based S&P 500 over the last year by 10%. Therefore, the first month that S&P 500 outperformed Nasdaq could be a sign of sector rotation away from technology which may bring a temporary correction to all technology stocks.

Source: www.finance.yahoo.com


The Nasdaq index increased from 5050 in November 2016 to its current 6130 in July 2017. This is a 21% increase over a 9-month period without any corrective pullback. Therefore, if the pullback finally happens, it may be a good opportunity to buy a The Priceline Group.

Share performance

The company has been having a positive momentum and has been increasing recently as well as throughout the history. It reached a peak of $144 in 2008, before the financial crisis, and since then increased twelve-fold.

Source: www.finance.yahoo.com


I deliberately chose a $144 peak before the financial crisis otherwise the increase could be assigned to cyclicality rather than structural benefits in the industry. Looking at more recent performance, the company had a pause in the bullish uptrend and moved sideways in a period between 2014 and 2016. The trading was in the range of $1000 and $1300.

Source: www.finance.yahoo.com


It breached $1300 in August 2016 and increased to current $1850. It seems like $1900 acts as a resistance and in my point of view, there is a high likelihood the shares can fall to $1600. The reason is that there was a peak of $1927 in May and second attempt to reach high was unsuccessful and created a lower high. The key level to watch for will be $1800 and if that is breached, it can start a corrective pullback towards $1600.

Source: www.finance.yahoo.com


If the pullback happens to $1600, I would be a buyer. There is also a possibility it can fall further and attack $1300 but I would not rely that much on it. The reason why it may decline is just a general correction in the technology sector as I outlined above. The company has been on a 12-month upward movement without any correction in the same way as the whole Nasdaq index. The Priceline Group increased from $1300 to $1900 which is 46% increase without any significant pullback. Similarly, the shares increased from April 2013 price of $700 to March 2014 price of $1350 in a matter of 12 months. And then followed a corrective pullback to $1000 in January 2015 and again in February 2016. Therefore, I suspect similar thing may happen in the foreseeable future. The reason why I would like to enter long is the positive structural change in the industry.


Travel industry trends

The online travel industry is set to benefit from structural changes that have been happ ening already. The benefits are due to digitalization and Millennials preferential habits. Perhaps these are interconnected. Millennials are characterized as the first digitally literate and therefore, prefer making purchases online. This is clearly beneficial for the online travel industry. But, Millennials are about to change the industry through their preferential habits as well. Millennials are the most populous generation in history. Even more populated than Baby Boomers. This is the population above the age of 15 and below 30 with the majority being in the 20s.


Source: Goldman Sachs

According to Goldman Sachs, Millennials are more likely to spend money on experiences rather than physical ownership. They do not prefer home and car ownership and prefer sharing than owning. Therefore, this group would more likely spend dollars on travel. And so, The Priceline Group, TripAdvisor (TRIP), and Expedia (EXPE) have been all benefiting from the positive trends and are expected to benefit in the foreseeable future. But, my argument is that The Priceline Group has the strongest competitive advantage and trades at cheapest valuation.


Peers price comparisons

The Priceline Group stands out in terms of valuation. On a forward price to earnings, it has the cheapest valuation.

Source: Author’s Calculation, www.finance.yahoo.com


And yet, it is projected to deliver the strongest growth compared to Expedia and TripAdvisor.

Source: Author’s Calculation, www.finance.yahoo.com


In my point of view, the company does have a strong competitive advantage. The reason why I think so is higher profitability compared to peers.

Source: The Priceline Group 10K’s


Source: TripAdvisor 10K’s

Source: Expedia 10K’s


And as opposed to TripAdvisor and Expedia, this profitability has been preserved. Furthermore, the company does not carry any potential headwinds on the balance-sheet.

Balance-sheet strength

The company does have $6.2bn of debt on the books. But, it does also carry $2.1bn of cash, $2.2bn of short-term investments predominantly in the form of government bonds and $9.4bn of long-term investment predominantly in the form of corporate bonds.

Source: The Priceline Group 10K 2016


Therefore, the balance sheet is extremely healthy and it does not possess any risk even if the recession comes. Even though I am presenting a bullish case, I should highlight the potential risks as well.

Potential downside

There are two main reasons why the investment can turn bad even if investors buy at lower price. One is related to general cyclicality. Given the long durability of the bull market, we may be nearing the end of the cycle. If the recession comes, then definitely people will lose jobs and spend less money on travel. Consequently, The Priceline Group and peers will earn less money. But, this is rather connected to overall economic cycle than company specific risks. The second reason is more connected to the industry risk and that is the competition in the travel industry is very intense.


Source: The Priceline Group 10K 2016

Looking at the list of the competitors, it is a very long list. This means, that in the future, the high margins may be put under pressure the same way as was in TripAdvisors case. However, I still think that booking is the first choice for individuals and companies to search and book the travel accommodation. The brand recognition that has been built over the years is outstanding. Therefore, my personal assumption is that The Priceline Group will be the winner in this industry and the margins will be preserved as was the case throughout the history.

Takeaway

The short-term weakness in the technology sector may send The Priceline Group to a decent pullback. If that happens, it will be a good opportunity to buy. The company has been delivering outstanding results for years and it is in perfect shape to deliver those results in the future as well, given the structural positive trends in the industry. In addition to that, the company trades at cheaper valuation compared to peers.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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