The Priceline Group (PCLN) Quarterly Valuation – April 2014
Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing 5 Undervalued Companies for the Enterprising Investor. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how The Priceline Group Inc. (PCLN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Priceline Group Inc, formerly Priceline Com Incorporated, incorporated on July 30, 1998, is an online travel company that offers its customers hotel room reservations at over 295,000 hotels worldwide through the Booking.com, priceline.com and Agoda brands. In the United States, the Company also offers its customers reservations for car rentals, airline tickets, vacation packages, destination services and cruises through the priceline.com brand. It offers car rental reservations worldwide through rentalcars.com. During the year ended December 31, 2012, its international business (the majority of which is generated by Booking.com) represented approximately 82% of its gross bookings (an operating and statistical metric referring to the total dollar value, generally inclusive of all taxes and fees, of all travel services purchased by its customers), and approximately 92% of its consolidated operating income.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
Valuation Summary
Key Data:
| Recent Price | $1,221.04 |
| MG Value | $984.73 |
| MG Opinion | Overvalued |
| Value Based on 3% Growth | $370.87 |
| Value Based on 0% Growth | $217.41 |
| Market Implied Growth Rate | 19.62% |
| Net Current Asset Value (NCAV) | $75.87 |
| PEmg | 47.74 |
| Current Ratio | 5.41 |
| PB Ratio | 9.19 |
Balance Sheet – 12/31/2013
| Current Assets | $7,480,900,000 |
| Current Liabilities | $1,381,700,000 |
| Total Debt | $1,750,600,000 |
| Total Assets | $10,444,500,000 |
| Intangible Assets | $2,789,900,000 |
| Total Liabilities | $3,534,700,000 |
| Outstanding Shares | 52,010,000 |
Earnings Per Share
| 2013 | $36.11 |
| 2012 | $27.66 |
| 2011 | $20.63 |
| 2010 | $10.35 |
| 2009 | $9.88 |
| 2008 | $3.98 |
| 2007 | $3.42 |
| 2006 | $1.62 |
| 2005 | $4.11 |
| 2004 | $0.00 |
Earnings Per Share – ModernGraham
| 2013 | $25.58 |
| 2012 | $18.37 |
| 2011 | $12.37 |
| 2010 | $7.44 |
| 2009 | $5.53 |
| 2008 | $3.11 |
Conclusion:
Priceline qualifies for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor’s concerns are numerous and include the insufficient earnings stability over the ten year period, the lack of dividend payments, and the high PEmg and PB ratios. Â The Enterprising Investor is only concerned about the lack of dividend payments. Â As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research, including a review of 5 Low PEmg Companies for the Defensive Investor and 5 Outstanding Dow Components. Â From a valuation perspective, the company appears to be overvalued presently despite showing astronomical growth in EPSmg (normalized earnings) from $5.53 in 2009 to $25.58 for 2013. Â This high level of demonstrated growth is impressive and outpaces the market’s implied estimate of 19.62%, but the ModernGraham growth estimate is capped at 15% in order to institute a safety margin, and the ModernGraham valuation model has therefore returned an estimate of intrinsic value that falls below the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on The Priceline Group (PCLN)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
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Disclaimer: Â The author did not hold a position in The Priceline Group (PCLN) or any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.
