Priceline: A Growth Powerhouse – Forecast Profits And/Or Cash Flow Not Prices!

Introduction

This is the second in a series of articles where I will cover popular and/or high profile stocks. The primary objective of this series will be to put a spotlight on the importance of forecasting future growth prior to making an investment decision. The central idea is to determine whether or not a reasonable forecast of future growth warrants consideration for investment relative to how the market is currently valuing a given stock.

Priceline: The Dominant Worldwide Player in the Growing Leisure Travel Industry

The following excerpt from a report by Morningstar senior equity analysts Dan Wasjolek illustrates Priceline’s industry dominance:

“On June 30, 2017, Priceline had around 600,000 traditional hotel properties on its network, which compares with Expedia’s 375,000 at the end of its June quarter. On the demand side, Priceline was a top-five travel mobile application in 68 countries, versus two and 18 for Expedia and TripAdvisor, respectively (on Aug. 8, 2017, according to App Annie). Also on the demand side, customers booked 170 million room nights through Priceline in the second quarter of 2017 versus 80 million on Expedia brands.”

Forecasting is the Key

One of the most important investment principles is the undeniable relationship between earnings and/or cash flow growth and long-term shareholder returns. After literally examining thousands of fundamental graphs, I can confidently state that the profit and/or cash flow growth of each respective company are the most critical drivers of returns. Valuation plays a major role; however, it is the rate of change of earnings and/or cash flow growth that matters most of all. Therefore, it only logically follows that the key to success is forecasting earnings and/or cash flows.

The good news is that calculating the prospects of a well-run business’ growth potential can be accomplished with enough accuracy to be relied upon. Guessing how short-term stock prices may behave is an exercise in futility. Think hard about the implications of this. Investors everywhere are obsessed with forecasting stock prices, a task that is impossible to accomplish, yet they tirelessly persist. No matter how often they are proven wrong, they continue on. Yet ironically, the easier and more rational approach is hiding in plain sight. Fundamental analysis may seem harder, yet in truth, it is not. The hard part is exercising the patience and trust to allow the results to manifest as they must inevitably do. Instant gratification is not a promise of sound long- long-term investing.