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Why Priceline’s Second-Quarter Margin Is Expected to Fall

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Analyst estimates

For 2Q17, analysts are estimating Priceline Group’s (PCLN) EBITDA (earnings before interest, tax, depreciation, and amortization) to rise 6.7% YoY (year-over-year) to $925.4 million, mainly on the back of revenue growth since margins for the quarter are expected to fall to 31.0% from 33.9% in 2Q16.

For 2017, EBITDA is expected to rise 14.2% YoY to $4.8 billion. Again, growth will be mainly due to growth in gross bookings and thus revenues, as we saw in the previous part of this series. Its EBITDA margin is expected to fall slightly to 38.1% in 2017 compared to 38.5% in 2016.

Expedia’s EBITDA margin is expected to remain almost stable at 18.2% in 2017, TripAdvisor’s (TRIP) EBITDA margin is expected to fall to 20.0%, while Ctrip.com’s (CTRP) margin is expected to rise to 11.6% in 2017.

Advertising costs rise

Priceline expects to continue its paid channel marketing in the second quarter in order to attract new customers. However, advertising efficiencies are declining, and Priceline thus expects the return on investment for its marketing spending to fall, which will also impact margins.

For 2016, Priceline’s performance advertising costs have risen 27.1% YoY. Brand advertising costs have risen 8.0% YoY. Sales and marketing expenses have risen 23.2% YoY.

Outlook

For 2Q17, Priceline expects to record adjusted EBITDA of approximately $860.0 million to $905.0 million, an average 9.0% YoY growth. It also expects its gross profit to rise 14.0%–19.0% (17.0%–22.0% on a constant currency basis). GAAP (generally accepted accounting principles) EPS (earnings per share) is expected to rise to $12.55–$13.25, an 11.0% YoY growth. Non-GAAP EPS is expected to rise 8.0% YoY to $13.30–$14.

You can gain exposure to Priceline stock by investing in the PowerShares DWA Consumer Cyclicals Momentum ETF (PEZ), in which PCLN has the highest weight of ~4.6%. PEZ also holds 3.3% in Expedia (EXPE). However, it has no exposure to other online travel stocks, including TripAdvisor (TRIP) and Ctrip.com International (CTRP).

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