How Investors Can Assess Priceline’s Increasing Leverage

Increasing debt

Priceline (PCLN) and its competitor Expedia (EXPE) have been aggressively acquiring smaller players in a bid to achieve growth. Both companies have been trying to outpace each other.

Both EXPE and PCLN have shown interest in China’s Ctrip.com (CTRP), with PCLN increasing its stake in the company. Participating in TripAdvisor’s (TRIP) Instant Booking platform is another way for Priceline to outpace EXPE.

How Investors Can Assess Priceline’s Increasing Leverage

Priceline (PCLN) has been funding some of these acquisitions through debt. Total debt on PCLN’s balance sheet increased from $3.9 billion at the end of 2014 to $6.2 billion at the end of 2015 and remained constant at $6.2 billion at the end of 2017.

However, increasing profitability has helped Priceline improve its leverage ratios. Its net debt-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] ratio had increased from 0.2x at the end of 2014 to 4.0x at the end of 2015. However, the ratio has been improving since 1Q16. After rising to 5.1x at the end of 1Q16, Priceline’s leverage decreased to 3.4x at the end of 2016.

At the end of 2016, PCLN had $4.3 billion in cash on its balance sheet. To avoid the risk of investing in a particular stock, investors can gain exposure to Priceline by investing in the First Trust NASDAQ-100 Ex-Technology Sector Index ETF (QQXT), which invests 1.6% of its holdings in the stock.

Why is increasing leverage risky?

Priceline’s growth is dependent on growth in travel demand and the US dollar. The US dollar is expected to stay strong for some time, given deteriorating global conditions that could subdue PCLN’s growth.

High leverage and interest costs can reduce the company’s ability to cope with unfavorable conditions, which could increase its risk profile.