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Priceline's Price Is Still Accommodating

Matthew Coffina, CFA

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Priceline has had a tumultuous couple of weeks and I'm joined by Matt Coffina, the editor of our StockInvestor newsletter, for his take on what's happening there.

Matt, thanks for joining me.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: So, let's talk a little bit about Priceline. When they reported results, the results were OK, but their guidance looked pretty weak. What's going on here? Is the travel market kind of falling apart here?

Coffina: So, Priceline Group gross travel bookings--this is a measure of their total bookings that take place on their website--about 26% in the first quarter and then management projected 11%-18% growth for the second quarter. So, that's a pretty steep deceleration. I think it's important to keep in mind a few factors. One, 11%-18% growth is still really good. Mid-20% is fantastic and especially when you consider the environment. So, you have global terrorism risks, you have the Zika virus still in South America. You have economic concerns around the world, especially in emerging markets. So, there's all these reasons that people might be reconsidering traveling, and yet Priceline is still growing at a very healthy rate really driven by the shift to online travel booking.

Glaser: So, you don't see this as diminishing of their competitive advantage?

Coffina: Well, the other concern I think--or the other thing you should keep in mind is that Priceline has historically been very conservative in issuing guidance. So, I would be surprised if they don't come in toward the high end or even above the high end of their guidance for the second quarter. Also worth keeping in mind that they are growing much faster than Expedia. So, Expedia's organic growth rate last quarter was only about 10%, again, versus Priceline at 26%. So, I really don't see it as any kind of negative indication on their competitive advantage. We still think they have the strongest moat among online travel agencies.

Glaser: Now, one of the other issues facing the firm has been an unexpected management turnover when their CEO was ousted. Does this give you any concern about stewardship, any strategy issues that could pop up?

Coffina: That may be another reason for management's conservatism. I think any time you have management turnover, you're going to want to be a little bit more conservative. But we really don't have any concern about this. So, the former CEO, it was revealed that he had a personal relationship unrelated to the business that was a violation of the company's code of ethics. So, he was dismissed basically or asked to resign. But the CEO who is coming in in his place was actually the CEO from 2002 to 2013. He is the one that really oversaw the massive growth of Priceline during that time, really made it into the business that it is today and he is just taking over on an interim basis. I'd love to see him stay for the long run. But even if not, I think that this is going to be a smooth transition.

Glaser: So, where do you see valuation right now?

Coffina: So, Priceline trades at about a low 20s multiple of earnings. Even if you account for stock-based compensation, it's somewhere in the low 20s. So, again, even with the deceleration that they are projecting for the second quarter, I think that's a very reasonable valuation for a company with double-digit growth really as far as the eye can see. If we get a better macroeconomic environment, maybe they can do even better than that. If things really fall apart, maybe they will do a little bit worse. But I think the risk/reward trade-off is still very favorable for a company that's created a tremendous amount of shareholder value over many years.

Glaser: Matt, thanks for your analysis.

Coffina: Thanks for having me, Jeremy.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.