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Analyst Blog

The Priceline Group Inc. (PCLN - Free Report) is slated to report third-quarter 2016 earnings on Nov 7 after the bell.

The company is one of two leading players in a highly fragmented online travel booking market, the other one being Expedia (EXPE). But the two companies are different because Priceline generates most of its revenues overseas particularly Europe while Expedia is more focused on North America. Both companies are expanding geographically.

Priceline is focused on improving the travel booking experience (Booking.com is now harnessing the power of artificial intelligence to increase personalization in phases). This is likely to have an impact on results. 

Another emerging trend is the alternative accommodations segment, where both Priceline and Expedia have been strengthening their presence. Privately-held Airbnb is the frontrunner here, but the leading Open Travel Alliances (OTA) has a huge reach and can come up strongly from behind.

Let’s take a quick look at how Priceline has been doing recently:

Factors to Consider

Last Quarter Recap: In the second quarter, Priceline beat the Zacks Consensus Estimate on both the top and bottom lines.

Both agency and merchant businesses remained strong, with room nights growing much faster than in recent history. The rental cars business was also quite strong. The only point of persistent weakness was airline tickets.

Though management had expected currency impact to be neutral, it continued to put pressure on results since most of the business is generated overseas. But the company’s revenues grew anyway and margins also went up sequentially.

Terrorist attacks had a negative impact on bookings and resulted in increased cancellations in affected areas but the total impact on Priceline was negligible.

Management said that Brexit and the devaluation of British currency will have a limited impact on Priceline as UK destination gross profit and UK source gross bookings were only around 10% of the business.

Third Quarter Expectations: For the third quarter, Priceline expects room nights booked to grow 18-23% and total gross bookings to grow 14-19% year over year (15-20% on a constant currency basis). This is expected to yield a year-over-year revenue increase of 12-17% ($3.55 billion at the mid-point), below the $3.59 billion analysts were expecting.

Priceline expects gross profit dollars to increase 15-20% (16-21% on a constant currency basis), with adjusted EBITDA in a range of $1.73-$1.83 billion.

Pro forma earnings per share are expected to come in a range of $28.30-$29.80. The Zacks Consensus Estimate is pegged at $28.64. GAAP net income is expected to be $1.30-1.38 billion, or $26.10-$27.60 a share.

Attractive Industry

The U.S. Commerce Department estimates international travel to the U.S. to grow at a CAGR of 3.1% from 2015 to 2020. Visitor volume is expected to grow from 0.4% in 2015 to 2.6% this year. Inbound travel volumes from Mexico, China, Canada and the UK will be the highest during this period. Moreover, market research data indicates that prices are rising across the world, with the biggest increases in Central/South America and the Middle East/Africa. Since it is a major international player, these trends play into Priceline’s sweet spot.

PRICELINE.COM Price and EPS Surprise

What Do the Numbers Say

The company has topped estimates in each of the last four quarters at an average rate of 6.60%. Not just that, the company hasn’t missed estimates in any quarter since 2012, which is a very big deal and seems to indicate that this quarter will be no different.

But the Zacks methodology indicates that this alone may not be a reason to buy the shares heading into earnings.

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or #3 (Hold) will have a good chance of beating estimates if it also has a positive Earnings ESP. The Sell-rated stocks (Zacks Ranks #4 and #5) are best avoided.

Priceline has a Zacks Rank #3 (Hold) and an Earnings ESP of -3.77%. Hence, it’s difficult to predict a positive surprise. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.

Summing Up

Priceline belongs to an attractive industry and has a strong international presence, which is particularly positive for the business although it means that FX is always an important factor. The company has a solid history of positive surprises and this quarter may not be different. However, given its Zacks Rank #3 and rich valuation it is difficult to recommend the shares at this point.

Safer bets would be:

SITO Mobile, Ltd. (SITO - Free Report) , with an Earnings ESP of +100.00% and Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Stratasys Ltd. (SSYS - Free Report) , with an Earnings ESP of +41.67% and Zacks Rank #1.

Methanex Corporation (MEOH - Free Report) with an Earnings ESP of +600.0% and a Zacks Rank #3

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