Priceline.com Plunges $113

Shares of Priceline.com ($PCLN) are getting severely crushed today. Imagine the USA-Nigeria basketball game, but in stock form. PCLN has been down as much as $113.70, or 16.73%. After the close yesterday, the company reported earnings of $7.85 per share which was very good; it was 49 cents per share more than Wall Street’s consensus.

The problem, however, was guidance for this quarter. The Street had been expecting Q3 earnings of $12.79 per share on revenue of $1.795 billion. Priceline now says earnings will range between $11.10 and $12.10 per share and sales will be between $1.6 billion and $1.67 billion.

Both Priceline and Orbitz are being hurt by the problems in Europe. So is Priceline a good buy at this price? Let’s bring in our World’s Simplest Stock Valuation Measure:

Growth Rate/2 + 8 = PE Ratio

As a reminder, this is just a simple, ballpark tool and we shouldn’t overly rely on it. Wall Street currently projects a five-year earnings growth rate for Priceline of 23.68%. That translates to a P/E Ratio of 19.84. Wall Street’s earnings forecast for 2013 is $38.95, so that works out to a fair value of $772. It appears that Priceline is currently going for $200 below its fair value.

But we should make some adjustments based on the recent lower guidance. The midpoint of today’s guidance is about 9.3% below Wall Street’s forecast. If we apply that as a constant to next year’s earnings, that brings it down to $35.33.

Now as far as growth is concerned, we have to get a little creative. I don’t believe we need to adjust the long-term growth rate by the full 9.3%. Instead, I think it’s better to ratchet it down by half or 4.65%. Decreasing the rate of growth by 4.65% (note, not the overall number but a reduction in the rate) brings the new five-year growth rate to 17.93%. That’s gives us a fair value of $599.

That’s just an estimate but I think it’s a reasonable one. This means that Priceline may be a bit undervalued but not by much. I don’t think something is a strong buy until it’s at least 30% undervalued.

Posted by on August 8th, 2012 at 12:10 pm


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