If I had to nominate the best-run business of the early 21st century, Netflix (Nasdaq: NFLX), Apple (Nasdaq: AAPL) and Priceline (Nasdaq: PCLN) make the first ballot. Each company took a fresh look at their industry... and introduced revolutionary new approaches that left rivals flat-footed.
Priceline, in particular, deserves special mention, not only for its visionary ability to rewrite the rules of the century-old travel industry, but for a knack to acquire any emerging rival that could further boost growth and eliminate competitive threats. Priceline's purchases of Agoda and Booking.com in 2007 and Kayak.com in 2012 partially explain why this company has boosted sales at least 20% in each of the past seven years, and is expected to do so again in 2014 and 2015.
Still, Priceline's current $67 billion market value, which equates to roughly 35 times trailing earnings, embeds an awful lot of success. And investors, as they have pushed shares into quadruple-digit territory, may have overlooked some serious speed bumps in the road ahead. If you have been fortunate to own this stock all the way up, it may be time to cash in your winnings. Three reasons in particular come to mind.
|1. Bumpy Quarters|
|It's been a while since Priceline took note of a slowdown in travel. But when a temporary slowdown comes, shares can take a stiff hit. Back in the spring of 2010, a volcano in Iceland disrupted European air travel. Investors feared a prolonged slowdown and fled this stock quickly.
Shares have hit similar, though less pronounced air pockets at various times in the past decade, and on each occasion, quickly fell more than 20% from their peak.
Back in August 2012, I suggested that such dips were great buying opportunities, but shares have more than doubled since then.
As I wrote back then: "When the company is firing on all cylinders, its shares start to get pretty lushly valued. At that point, you're better off booking profits, because eventually, Priceline will deliver a weak quarter and its shares will temporarily move into the doghouse. And that's the time to buy." Right now, we're in lush valuation territory.
|2. There's No Moat|
|I have been a regular user of Priceline over the years, enjoying its convenience and low prices.
More recently, I've been using an app called Hotel Tonight. It provides great prices on hotel rooms for noncommittal last-minute travelers like me. This got me to thinking: What's to stop any company from entering that niche?
Thus far, we've heard no mention of whether such apps are impacting Priceline's business or taking meaningful market share. But investors are mistaken in thinking that there is any sort of moat around this business. That's what travel agents once thought about their own businesses.
|3. Insiders Heading For The Exits|
|You can't blame any insider for taking profits in company stock -- especially if that stock has risen 1,500% over the past five years. But the pace of insider selling is sharply accelerating.
Here's a look at the dollar volume of insider sales by quarter.
Remember, these are the folks who possess deep insights into the company's competitive landscape, business and consumer travel trends -- and Wall Street's growth expectations. If they thought that Wall Street was underestimating the company's macro backdrop, they wouldn't be selling in such large quantities.
Risks to Consider: The clearest upside risk is a shift from hotel operators and airline carriers to provide even more inventory for Priceline to sell.
Action to Take --> Shares of Priceline have begun to lose altitude lately, but this company is still valued at $67 billion, while free cash flow in 2013 was merely $2.2 billion. That's an awfully high free cash flow multiple for a business that has fewer barriers to entry and greater economic sensitivity than many suspect. This is too great a company to bet against, and shorting the stock is unwise, unless you have a high degree of conviction that forward earnings estimates are at risk.
Management has lowered near-term guidance recently, and consensus first-quarter earnings per share (EPS) forecasts have slipped from around $7.20 a share a month ago to a recent $6.90 a share. Yet analysts have also raised their full-year 2014 and 2015 EPS outlooks in that time, which is hard to square.
If Priceline is subject to full-year downward profit revisions in coming months, then this stock could stumble pretty badly. Yet as I noted earlier, that would set the stage for the next buying opportunity.