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By Matthew Coffina, CFA | 01-29-2015 02:00 PM

Priceline May Be Just the Ticket

This narrow-moat online travel agency should expand much faster than its competitors and currently looks attractively priced, even given the headwinds, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Matt Coffina. He is the editor of Morningstar StockInvestor newsletter. He recently initiated a position in Priceline (PCLN). We're going to talk about his thinking behind this purchase.

Matt, thanks for joining me.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: Could you start off by just kind of walking us through Priceline's business? We're probably familiar with the William Shatner commercials, but what else is going on in this company?

Coffina: Fortunately, the whole business isn't William Shatner. Actually,, which is the brand that most U.S. consumers are probably most familiar with, is a very small part of the business. Their core business is really, which is very strong in Europe. It's the leading online travel agency in Europe. And then they also have a few other brands like Kayak,, which is strong in Southeast Asia, and so on. But it's really a very international company and very much dependent on the European travel market as opposed to the U.S. travel market.

Glaser: So, there is no shortage of online travel agencies out there. Do you think Priceline has a moat? How has it dug out a competitive advantage?

Coffina: There maybe actually aren't as many as you might think. As I mentioned, Priceline owns a variety of brands. Expedia (EXPE) also owns, Hotwire, Travelocity, Trivago. So, there are a lot of brands out there, but really they are only held by a handful of companies--especially in more developed markets. The emerging markets are still sort of figuring things out, and it's more intensely competitive. But what we have observed is that the online travel agency market has tended to consolidate around just a couple of leading firms, and we think what drives that is that there's really an advantage to being the largest player in a market. So, you have a network effect that develops between travelers who want access to as many hotels as possible and hotels that want access to as many travelers as possible so that they can fill rooms.

There are other advantages to scale. For example, you're able to use your data and also able to constantly test and retest the designs of your sites to try to optimize the conversion process so that the leading brands like Priceline are generally able to outbid smaller competitors like maybe an Orbitz (OWW) that's trying to gain scale on the business. They are generally able to outbid the smaller competitors for Google search results or ad listings on TripAdvisor (TRIP) or wherever it may be. So, it's sort of a positive feedback loop that develops. And again, the market share has really tended to consolidate around the leading few players, and then you have the smaller players out there like Orbitz that tend to be much less profitable and tend to lose market share over time.

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