Priceline's Rally at Risk as Greek Economic Crisis Spreads, Euro Plunges
Priceline.com Inc.’s five-year quest to get bigger in Europe is backfiring as the economic crisis in Greece and weakness in the euro threaten to crimp sales and reverse the rally that propelled the stock to a 10-year high.
International bookings accounted for about 61 percent of last year’s total for the online travel company, up from 58 percent a year earlier and 41 percent in 2006. Most of its international business is in Europe.
Turmoil in Greece and a plunge in the value of the euro had dragged Priceline shares down 17 percent before today since April 29, when they were at their highest in a decade. The region’s woes highlight risks of a strategy that has benefited Priceline as European consumers book more travel online. Now the company is more exposed than rivals Expedia Inc. and Orbitz Worldwide Inc.
“Europe is becoming a bigger and bigger piece of the pie,” said Vance Edelson, an analyst at Morgan Stanley in New York, who has an “equal-weight” rating on Priceline shares and doesn’t own them. “If consumers are not going to travel for whatever reason, that’s going to be a concern.”
Investors will get a glimpse of Europe’s impact on earnings later today, when Norwalk, Connecticut-based Priceline reports first-quarter results after the close of U.S. markets. The company, whose pitchman is William Shatner of “Star Trek” fame, may say net income more than doubled to $59.1 million, according to the average of analysts’ estimates compiled by Bloomberg News. They predict a 29 percent increase in sales to $595.7 million.
Priceline shares jumped $20.51, or 9.1 percent, to $245.90 at 9:42 a.m. New York time in Nasdaq Stock Market trading. They climbed as much as 10 percent to $22.61, the biggest gain since Nov. 10, after European policy makers agreed to an almost $1 trillion financial assistance package. Even after slumping last week, the stock has still more than doubled in the past year.
Priceline’s earnings come a week after Greece required a 110 billion euro ($140 billion) bailout from the European Union and International Monetary Fund. The fiscal crisis may affect banks in Portugal, Spain, Italy, Ireland and the U.K., Moody’s Investors Service said in a May 6 report.
Brian Ek, a spokesman for Priceline, declined to comment ahead of the results.
With three-quarters of its operating profit coming from outside the U.S., mostly from Europe, Priceline may also see lower earnings as it converts euro-denominated sales back to dollars. Last week, the euro slumped to its lowest level against the dollar since March 2009, trading for $1.26 on May 6.
Priceline’s competitors are more tethered to the U.S. In the first quarter, international business accounted for 36 percent of Expedia’s bookings and 17 percent at Chicago-based Orbitz.
Expedia said on April 30 that it experienced increased flight and hotel cancellations in Europe “as travelers wait for the uncertainty surrounding the travel environment to subside.” The volcano eruption in Iceland that shut airspace over parts of Europe last month also hurt demand, the Bellevue, Washington- based company said.
Priceline’s European growth accelerated in 2005, when it bought Amsterdam-based Bookings BV, now called Booking.com. In its 2009 annual report, Priceline said it still sees “superior growth rate opportunities” from international travel.
Henry Harteveldt, a travel analyst at Cambridge, Massachusetts-based Forrester Research Inc., said that Priceline’s business model helps the company during economic declines. That’s because the name-your-own-price option, where customers can say how much they’re willing to pay for accommodations, appeals to thrifty travelers as well as hotels that need to book empty rooms, he said.
Actor Shatner, who played Captain Kirk in “Star Trek,” appears in advertisements that tout Priceline’s name-your-own- price policy. As the “negotiator,” Shatner encourages customers in commercials to “go lower.”
“Priceline really enjoys a unique relationship with hotels,” Harteveldt said. “Priceline is great in a time of need.”
The company has room to grow in Europe because travelers there still mainly book offline, said James Cakmak, an analyst at Sidoti & Co. in New York. In the U.S. last year, 56 percent of travel expenditures occurred online, compared with 32 percent in Europe, according to consulting firm PhoCusWright Inc.
“We’re still in the early stages of adoption,” said Cakmak, who recommends buying the shares. “Even though their peers are putting forth good effort into penetrating that market as well, Priceline has a clear head start.”
Still, the company won’t be able to escape a lengthy economic decline, said Marianne Wolk, an analyst at New York- based Susquehanna Financial Group.
“Priceline is the most leveraged to Europe,” said Wolk, who has a “positive” rating on the shares and whose firm owns the stock. “The economies there and the strength in the dollar are certainly headwinds for them.”