Market Overview

Captain Kirk is Negotiating For Higher Prices

The Priceline Negotiator always gets his way.

PriceLine.Com (NASDAQ: PCLN) reported exceptionally strong third quarter earnings last night, but guided lower than Wall Street was expecting. Despite the mixed results, shares are "negotiating" their way higher this morning, up more than 5% in early Tuesday trade.

The online travel company reported third quarter earnings of $9.95 per share on $1.50 billion in revenues. Wall Street was looking for earnings of $9.30 per share on $1.42 billion in revenues.

Jeffery H. Boyd, President and Chief Executive Officer said, “Our global hotel nights grew by 47% over last year, reflecting moderate deceleration from the 2nd quarter. We believe our retail hotel businesses at Booking.com, Agoda and priceline.com continued to take meaningful share in their respective markets during the quarter, though our Name Your Own Price hotel business is challenged by increasing competition in the discount space.”

Although the company blew away earnings estimates, the company guided significantly lower than Wall Street was expecting. It said it expects fourth earnings of $4.90-$5.00 per share. Wall Street is expecting $5.14 per share.

So why are shares higher?

Some, including CNBC's Guy Adami, think that the Norwalk, CT-based company is "sandbagging" on guidance. He said that the metrics appear better than the company is letting on. The company did say that it expects gross fourth quarter travel bookings to be up 39-44%, helping Adami's case.

The company appears to be firing on all cylinders, with hotel room nights sold up 47%, rental car days up 36%, and airline tickets up nearly 8%. These are impressive metrics for a company that generates the majority of its revenues from Europe. The company mentioned that it had “concerns relating to potential sovereign defaults by Greece and other European states, may subject operating results to greater variability in the future.” It is very possible the company is doing what Apple (NASDAQ: AAPL) has been famous for: under promising, over delivering.

While Greece is still burning the ground, and Italy is a becoming more of a disaster by the day, people are still traveling in Europe it looks like. Priceline.com generates two thirds of its revenues from international sales, and that segment saw a 79% increase in revenues to $953 million.

J.P. Morgan is seeing the same thing that Adami sees, a potential sandbagging. The research firm wrote, "We believe 3Q results and the 4Q outlook continue to indicate strong underlying trends in Booking.com, despite tougher Y/Y comparisons in 3Q and macro headwinds in Europe."

Piper Jaffray, Bank of America, and Benchmark were also similarly positive on the company.

For a company to grow revenues by that amount in light of all the problems it is currently seeing in Europe is nothing short of impressive. Shares are richly valued on a dollar basis, but not on an earnings multiple basis. It trades at 18 times expected 2012 earnings, which is extremely cheap for a company that grew overall revenues by 45%, and international sales by 79%. The company is generating a return on equity of 41%, and has significantly more cash than debt on hand, which is extremely positive to see for a tech company.

With all of these metrics, it must be why William Shatner asked for shares in the company instead of cash when he agreed to do the commercials.

That's some serious negotiating.

ACTION ITEMS:

Bullish:
Traders who believe that Priceline will continue to see strong revenue growth might want to consider the following trades:

  • Shares are not expensive using 2012 estimates. Traders may want to look at buying calls in this name, since it is such a high priced stock.
  • Traders may also want to look at Expedia (NASDAQ: EXPE), which is in the process of spinning off its TripAdvisor division.

Bearish:
Traders who believe that European financial struggles will lead to decreased travel may consider alternate positions:

  • Although many think that priceline is "sandbagging" guidance, the company could be correct, and there could be a serious decline in European travel. That could cause shares to drop.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

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