Priceline Group Stock Analysis: Fidelity Stock Pitch Competition 2015

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<ul><li><p>Student Name-Shaun Harvey Name of University-University of Queensland Major-Accounting &amp; Finance Expected Year of Graduation-2015 Word Count-947 </p><p>Company and Sector Overview The Priceline Group is the worlds largest online travel agency, offering online booking services for hotel rooms, rental cars, airline tickets and various other vacation packages to consumers in over 200 countries. Their six primary brands are booking.com, priceline.com, agoda.com, KAYAK, rentalcars.com and OpenTable. Transaction and service fees from online bookings presently generate the majority of the groups earnings. The online travel industry is cyclical in nature as it is affected by changes in economic growth. In a downturn, consumers have less disposable income and therefore will cut back on expenses such as leisure travel, resulting in below average returns in the industry. The market leaders are Priceline Group and Expedia who control about 30% each and Obitz Worldwide who controls around 8%. The key drivers and influences of growth in the online travel industry in the coming years, revolve around three key themes: </p><p>1. Growing wealth and economic prosperity of China, along with other emerging countries. </p><p>2. Transition from desktop to mobile and handheld devices for online bookings. </p><p>3. Competition from existing and new entrants. </p><p>Investment Hypothesis </p><p>China and Other Emerging Markets Currently, forecasts point to China representing the bulk of online travel booking growth in coming years, with other emerging countries also representing significant portions. These countries have significantly under-penetrated markets and present extensive upside for companies that are able to establish themselves on a first mover basis. Priceline Group is well positioned to benefit from this thematic through their partnership with Ctrip, a mainland China-focused travel agency in which they hold approximately a 15% stake. Agoda.com is Pricelines other key brand that targets these emerging countries, with major operations in Singapore, Bangkok, Tokyo and Hong Kong. Pricelines brands have extended their reach well into these emerging markets with Priceline group being the 7th most visited website from desktop computers in Malaysia, behind internet giants Google, Facebook and Wikipedia (comScore, 2015). With international bookings growth of 31% in 2014 this trend is likely to remain favourable for several years, generating significant shareholder returns. </p><p>Mobile/Tablet Bookings Mobile bookings will account for approximately 25% of all U.S online travel sales in 2015 with tablets also commanding around 10%. This is a stark difference from the 5% of total sales from mobile and tablets combined in April 2010 (Workman, 2014). This illustrates how quickly the industry has evolved from solely requiring a customary desktop website to demanding a distinctive smartphone/tablet compatible website and app. Airbnb presently commands the most consumer traffic on mobile devices, with their product allowing consumers to rent their own house to travelers. Although this appears to be a significant threat to Priceline, there is a distinct contrast in the target markets of both Airbnb and Priceline, resulting in a negligible loss of market share and bookings. </p></li><li><p> Priceline has been at the forefront of the global shift to mobile bookings and has continually emphasized their mobile/tablet offering as a core component of their business strategy. This strategy was recently attested when Priceline logged approximately 50% of its total bookings on their mobile platform on several days in late 2014 and early 2015. Furthermore, Pricelines most renowned brand, booking.com has been recognized as a top five application in 41 markets around the world. This is a substantial lead in the mobile/tablet market compared to Expedia, who only ranked as a top five application in 6 markets. </p><p>Risk from Competition A core threat to Priceline Groups business involves increasing competition, from both existing and new entrants endeavoring to achieve comparable returns to that of Priceline. Currently Pricelines main competitors are Expedia and Orbitz, who are planning to merge as part of a 1.3B deal. This would make the merged Expedia/Obitiz, Pricelines key competitor and potentially a threat to their dominant market position. The table below displays key statistics of Priceline Group contrasted with the merged Expedia/Obitz entity. </p><p>Data-Morningstar.com *Not inclusive of Ctrip properties (170,000) **Not inclusive of eLong properties As evidenced above although the merger between Expedia/Orbitz has resulted in a tougher, larger competitor, ultimately Priceline will continue to yield majority control of the online travel industry. Priceline also faces the threat of competition from new entrants, especially from those that already have a network of customers using their website/mobile application, such as: Google and Facebook. Priceline however, has the strongest network of properties, IT systems and client relationships in the market. A new entrant would need to spend considerable amounts on advertising, IT and human capital, simply to build and maintain relationships with hotels, customers etc. These factors, along with competing against other global players such as Expedia/Orbitz results in a high risk, low reward investment for new entrants, one that will deter most from the outset. </p><p>Value Presently, the market substantially overestimates the risks posed to Priceline from existing and new competitors. This is where the majority of the value in Priceline Group lies. Due to this irrationality by the market, Priceline currently trades at a discount to all of its 5 year historical average valuations and also on a Price to Earnings and Price to Book basis compared to peers. In addition, after completing a discounted cash flow analysis we have ascertained a fair value of $1,457.70 per share. This valuation has taken into account several key factors such as annual growth rate of bookings (approximately 15% p.a), increases in advertising expenses (required to strengthen emerging markets position) and expansion in operating margins (as a result of increased revenue relative to expenses before tax). These assumptions have been forecasted and discounted at a weighted average cost of capital of 9.5%. This being taken into account, a decision of a price target of $1,450 and a BUY recommendation is given. </p><p>Data-Morningstar.com </p></li></ul>