Online Travel Pair Trade? Priceline Downgraded, Expedia Upgraded At Deutsche Bank

In a report published Monday, Deutsche Bank analyst Lloyd Walmsley prefers

to

in the Online Travel industry, while expecting both companies to perform well in the near term. Analyst Lloyd Walmsley downgraded the rating on Priceline from Buy to Hold, while reducing the price target from $1,425 to $1,325. Shares are trading at the high end of the historic range, despite the company's decelerating growth, margin pressure and rising risks from Airbnb. "Priceline has a strong lead in hotels, superior execution and an under-appreciated strategic play in BookingSuite. But our proprietary analysis of its vacation rental (VR) bookings shows this segment adding an estimated 9ppts of int'l bookings growth ex-FX, without which core bookings growth would have been an estimated 19% y/y ex-FX in 4Q14 (vs headline +27% ex-FX)," the Deutsche Bank report noted. VR may account for about 30 percent of the international bookings growth, excluding currency effects, in 2015. While expressing optimism regarding Priceline's bookings growth in the near term and better margin guidance for 3Q, Walmsley said there were concerns around sustaining growth. Walmsley upgraded the rating on Expedia from Hold to Buy, while raising the price target from $95 to $130, saying that the shares could reach the $200 mark over the next five years, as the company continues to "execute on its core, extracts revenue and cost synergies from its acquisitions and rolls up the tier-2 OTA space with limited competition." Expedia can be expected to add new hotel supply, boosting room night growth and "implementing more advanced bid-for-placement systems to improve monetization." Expedia's CEO has renewed his employment agreement while tying 41 percent of stock options to achieving a price of $170 per share, which Walmsley pointed out is "a bullish sign."