How Investors Can Assess Priceline’s Increasing Leverage

Priceline (PCLN) has pursued its inorganic growth strategy aggressively over the years. As a result of this stategy, Priceline and rival Expedia (EXPE) dominate the online travel booking space.

With the launch of its Instant Booking platform, TripAdvisor (TRIP) has tried to break through into this space. Amazon (AMZN) and Google (GOOGL) have also been working to gain some share in this sector.

Some of Priceline’s (PCLN) acquisitions have come at the cost of increasing debt. The recent Momondo acquisition is an example. Priceline raised $1.1 billion debt in 1Q17 to finance the acquisition, taking its total debt to $7.3 billion at the end of 1Q17 from $6.2 billion at the end of 2016.

As a result, Priceline’s leverage ratio (net debt to EBITDA[1. earnings before interest, tax, depreciation, and amortization] ratio) increased from 3.4x at the end of 2016 to 4.5x at the end of 1Q17. However, it decreased to 2.6x at the end of 2Q17, primarily due to improving profitability.

Rival Expedia (EXPE) had a leverage ratio of 0.26x at the end of 3Q17. Ctrip International (CTRP) has a leverage ratio of 31.1x. TripAdvisor (TRIP) is in a better position by virtue of having more cash than debt on its balance sheet.

At the end of 2Q17, Priceline (PCLN) had $6.4 billion cash on its balance sheet. Its interest coverage ratio stood at 14.7x at the end of 2Q17. In 1H17, the company generated $1.6 billion in cash flow from operations, which translated to $1.5 billion in free cash flow for the same period.

Currently, these factors indicate Priceline’s ability to comfortably service its debt. Investors can gain broad-based exposure to Priceline by investing in the iShares US Consumer Services ETF (IYC), which invests 2.9% of its portfolio in the company.