Priceline-stockThe Priceline Group (NASDAQ: PCLN) suffers both the blessing and the curse of having once engineered a reverse split of its stock.

On the upside, when things are going well, Priceline stock soars and has reached a high of over $1,400 per share. On the downside, an earnings report that spooks investors even a little bit can crater Priceline stock by $130 in a single day.

That’s what happened on Monday after the Priceline earnings report, but I think the selloff was overdone. Let’s look at exactly what happened, see if I’m right, and see if Priceline is a stock worth owning at this reduced price.

Exceptional Bookings

Priceline said its third-quarter travel bookings hit $14.8 billion, up 7% over a year ago, although it was up 22% on a constant currency basis. So far, so good. I discount currency fluctuations, up or down, because its part of doing business. A 22% increase in bookings is exceptional.

Priceline’s gross profit was $2.9 billion, up 12%, and up 29% on a constant currency basis. Again, this is robust and very impressive.

Priceline’s report said net income was $1.3 billion, and that’s up 10% to $25.35 per diluted share, compared to $22.16 last year. This beat the consensus by $1.14. That’s also good news.

According to the Priceline earnings report, adjusted EBITDA, which is cash flow and what I consider to be the most important metric, totaled $1.6 billion, an increase of 12%.

Guidance Triggered Reaction

All of this demonstrates Priceline’s solid performance. I’m not upset by any of it. So why did the market kick Priceline in the teeth? Apparently, it was annoyed by fourth-quarter guidance, so let’s see what sticks out.

“Year-over-year increase in total gross travel bookings of approximately 1% – 8% (an increase of approximately 13% – 20% on a constant currency basis).”

Excellent numbers. Maybe not 22%, but that’s solid growth.

“Year-over-year increase in international gross travel bookings of approximately 3% – 10% (an increase of approximately 17% – 24% on a constant currency basis).”

Also exceptional, and in fact, even better overall. But because international is going to be stronger than global, it must be that U.S. bookings are going to fall.

“U.S. gross travel bookings are expected to decrease by 5% – 10% as compared to 4th quarter 2014.”

Ah ha! Here we go. Just how serious is this? The U.S. booking fell 2.5% in the third quarter versus flat guidance, so clearly the market isn’t happy about continued slowing.

However, when you dig deeper, what Priceline said in the conference call is that the “Name Your Own Price” product is showing weakness, ironically because the hotel industry is booming. That means hotel rooms are fuller and they have pricing power, meaning that product is not going to be as successful in terms of bookings growth, but revenue from hotel room bookings should be good. Indeed:

“Year-over-year increase in revenue of 1% – 8%, and in gross profit of 3% – 10% (an increase 14% – 21% on a constant currency basis).”

Then, to top it off, adjusted EBITDA of $710 million to $760 million. That translates to net income of $11.10 to $11.90 per share.

Buy Priceline at This Price?

This is all great news. The market has got to be crazy to sell the stock off that much.

But is Priceline a buy? The stock is at $1,324 per share. I back out the net cash of $3.95 billion, or about $80 per share, to arrive an effective price of $1,244 per share. That’s 21.5 times estimates of $57.70 per share in EPS. Analysts estimate a 15% EPS growth rate annually going forward.

Combined with Priceline’s brand name, cash flow and cash position, I assign a 10% premium to each. Fair value is thus about 19.5 times earnings, or about $1,125.

I don’t think paying that extra bit for a great growth stock is unreasonable. I think you should take advantage of the selloff and buy.

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Published by Wyatt Investment Research at