Priceline.com at a Good Price?

The price may be right to invest in online travel agent Priceline.com, known for its "Name Your Own Price" booking system. Citigroup analyst Mark Mahaney upgraded the stock (symbol PCLN) on May 17 to "buy" from "hold" on the premise that Wall Street misinterpreted the company’s first-quarter results. Priceline’s shares rose 6% following the upgrade, and closed at $60.78. Mahaney thinks the shares are worth $69.

The Norwalk, Conn., company’s stock has plunged 10% since it posted its first-quarter results on May 8. The results included a first-quarter loss that widened to $16.3 million, or 44 cents a share, from $964,000, or 2 cents a share, in the first quarter of 2006. These numbers are misleading, however, because the loss stemmed from a $55 charge relating to settlement of a lawsuit. Excluding the charge and other benefits and expenses, Priceline turned out a profit of 43 cents a share. That’s a dime more than analysts were expecting, according to Thomson Financial.

Revenue during the first quarter rose 25%, to $301.4 million, from the year-ago quarter. Not accounting for a $15.9 million gain from an IRS refund, Priceline’s revenue rose 18%, to $285.5 million. The company also reported that its gross travel bookings -- the total value of all travel products and services, including fees and taxes -- rose 91% in Europe. Meanwhile, the company’s domestic gross travel bookings grew 8%.

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The sell-off in the stock "represents a misread of Priceline’s strategy," Mahaney wrote in a note to clients. "Simply put, Priceline’s strategy is to aggressively grow its early-stage European business and to profitably mine its more mature U.S. business."

Along with rival Expedia, Priceline has been expanding in Europe, where only 22% of all leisure travel was booked online last year (versus 50% in the U.S.). Citigroup expects the European online travel market to grow nearly 25% through 2008. Europe is also ripe for continued growth in Web-based bookings, considering that independent hotels far outweigh chains. "Given the relative characteristics of the two online markets -- Europe is less penetrated, faster growing, and more fragmented -- a U.S. profit/European growth strategy is right," writes Mahaney.

Europe now accounts for half of Priceline’s bookings, versus about 20% for Expedia. "While growth [in Europe] may slow, it will still be very robust," says Mahaney. He thinks Priceline’s shares are attractively valued, given Priceline’s own estimate of 43% to 53% earnings growth in 2007. The stock trades at 19 times the $3.06 per share that analysts expect the company to earn this year.