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Priceline (PCLN) Tops Estimates, But Weak Guidance Sinks Shares

By: , dated August 9th, 2012

Shares of online travel agency Priceline (PCLN: Charts, News) plunged over 15% yesterday after the company revised its third quarter guidance downwards, due to European weakness. The Norwalk, Connecticut-based company, the largest U.S. online travel agency by market cap, adjusted its expected third quarter earnings to a range between $197 million to $203 million, far below the average analyst estimate of $216.4 million. Priceline’s expected revenue was also adjusted to a range between $1.58 billion and $1.67 billion, or 9% to 15% growth, missing the analyst forecast of $1.8 billion, or 24% growth. Susquehanna International Group analyst Herman Leung noted, “Guidance was a lot worse even off of lowered expectations.”

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Priceline’s dour guidance caused many investors to overlook its otherwise strong second quarter earnings. The company posted adjusted second quarter earnings of $7.85 per share, topping estimates by 49 cents. This was also a 37% increase from the prior year quarter. Revenue also rose 20% to $1.3 billion and topped estimates. Gross margin also rose from 67.9% to 75.7%.

Priceline, like its industry rival Orbitz (OWW: Charts, News), relies heavily on Europe, where travel has declined due to decreased discretionary spending. Priceline’s heavy European exposure is exacerbated by its 2005 acquisition of Amsterdam-based Booking.com. Much of Priceline’s previous gains were attributed to the strength of Booking.com, which has backfired since the European debt crisis unfolded. For the third quarter, Priceline faced declining average daily rates for hotels and notable weakness in Southern Europe and recession-struck U.K. The company continued to post high growth in the Americas and throughout its Asia Pacific region.

A strong U.S. dollar versus all other currencies also dented its overseas sales, since Priceline reports earnings in U.S. dollars. Priceline’s revised guidance disappointed investors, who had expected strong earnings after industry peer Expedia impressed markets with its robust second quarter earnings. Shares of Priceline, which trade at 26 times trailing earnings with a high beta of 1.25, are still up 22% since the beginning of the year.

CFO Daniel Finnegan acknowledged major macro challenges ahead. “Weak economic conditions and sovereign debt concerns further contributed to the level of deceleration experienced, particularly in our key European market, which represents about 60 percent of our total booked room nights,” he stated. Gross bookings and international booking rose 27% and 33% respectively during the second quarter, but those merely met the low end of the company’s original expectations. However, Priceline posted unusually strong international growth in the prior year quarter, which made topping expectations extraordinarily difficult.

Looking ahead, analysts remain bearish regarding Priceline’s lowered growth expectations. For the third quarter, gross travel bookings should rise between 10% and 18%, far lower than the second quarter’s 27% increase.

Shares of Priceline now trade at 14.7 times forward earnings with a 5-year PEG ratio of 0.92 – both strong buy signals on a fundamental, long-term basis. However, being a high-beta momentum stock, Priceline will be prone to some severe price swings in the near term. The stock does not currently pay a dividend.

Other News About PCLN
Priceline Shares Fall as Outlook Trails Street Forecast
Priceline beats the Street, but its guidance sinks shares.
Priceline, Orbitz Drop as Forecasts Misson Europe Crisis
The online travel sector plunges on Priceline’s bleak guidance.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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