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Acquisitive companies can be risky investments. But some – like
Before taking anyone’s investment advice, you should always check out their track record. Click here to find Thomas’s .
Ken Kam: What attracts you to PCLN as an investment opportunity?
Thomas Pound: Let me say first that Wall Street is pricing the company based on management’s quarterly guidance (management does not offer yearly guidance). This is foolhardy because of the extreme seasonality of Priceline's business. For example, management expects Q2 hotel bookings to be up 15% to 22%, yet that won't affect gross profits until Q3. It really depends on when special events and holidays occur.
Moreover – and most important for investors - Priceline has a history of lowballing its guidance. Over the last five quarters, management’s guidance undershot the company’s actual performance by about 7.7%. Wall Street is missing this. For example, the market has essentially ignored PCLN’s 17.5% profit growth (year over year) and 21% increase in revenues compared to its guidance of 14% and 9%, respectively. Instead, Wall Street is pricing the company based on management’s guidance for the next quarter which tends to be overly conservative.
Kam: Why does management typically lowball guidance?
Pound: You can see in their annual reports that they are keenly aware of competition from Orbitz,
Kam: And Wall Street is missing this?
Pound: Yes. Wall Street is still trading PCLN as if it’s a growth company that's not meeting expectations. It does indeed have good growth prospects, but PCLN is now a large player in the travel market. You need to view this company as a long-term investment, not as a trade. To merely focus on the next quarter is viewing this company through the wrong lens. Even if 17.5% profit growth is the new norm, the company still doubles profit in less than five years.
Kam: What’s driving PCLN’s growth?
Pound: Besides growing organically, they are good at making acquisitions. They’ve made some smart ones over the years such as Booking and Kayak. On a personal level, I use Kayak all the time, and am becoming very familiar with Open Table. The company is very cryptic in their reports, but I do look for them to snap up another nice piece to add to their portfolio. Trip Advisor would be a good acquisition. Time will tell, but this is not a company that remains static.
Kam: Why were Booking and Kayak smart acquisitions?
Pound: They look for companies that have the ability to turn a profit, but also have a mobile presence. In the case of Booking, it was a matter of finding international penetration in the market. Because of Booking, a vast majority of their profits come from outside the United States. More and more, people want convenience when they look for good deals. Booking and Kayak offer that right now.
Kam: And why Trip Advisor?
Pound: If they buy Trip Advisor, PCLN could create a platform of helping people get to a location, find accommodations for them once they are there, and find things for them to do while they’re there. It would all fit together.
Kam: What else would be good acquisitions for them?
Pound: I’m looking at
Kam: How much does PCLN’s growth depend on making acquisitions?
Pound: The most recent numbers they’re reporting are based on organic growth of the businesses they have today. They are adding more rooms every year through Booking, and Kayak is becoming a preferred platform for many people. I know it is for me. Based on that, I see a lot of growth even if they don’t make any further acquisitions. On the other hand, they have $3bn of cash on hand. So they have plenty of dry powder for making acquisitions.
Kam: If you are right about PCLN, what’s the return opportunity?
Pound: I see earnings continuing to grow 20% annually and the multiplier normalizing to a P/E of 20x. This gives you $2500 per share in five years – an easy double. Of course, it comes down to making a best guess and putting in enough margin of safety in the analysis. Even if the company does not double in five years, I still think it’s undervalued.
Kam: How much of a stretch is a 20x multiple?
Pound: Not a stretch at all. The company’s current P/E is 24.5x and its 5-year average is 30.5x. I’m lowballing like they do. I guess I’ve caught whatever they have!
My Take: Hitting doubles and triples, and avoiding big strike outs, is essential to generating superior investment returns. That requires a strong safety margin and a lot of upside even after taking a conservative view. Thomas Pound sees Priceline doubling in the next five years . His sterling long-term track record is ample reason to follow his lead.
Disclosure: I am the portfolio manager for a mutual fund advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.
