The Motley Fool: Priceline Group more than a travel group

The Motley Fool Take

If you’ve been assuming that The Priceline Group (Nasdaq: PCLN) is just another “me too” travel site, you’re wrong. It actually runs a collection of industry-leading enterprises such as Kayak.com, Rentalcars.com and OpenTable.com - and its crown jewel is Booking.com.

Booking.com is the leading player in online travel in Europe. As the European hotel market is very fragmented, many hotels are run by individual owners who lack the expertise and scale to market their hotel to online travelers. Thus, they’ve happily signed on to Booking.com’s platform to help fill rooms.

This is a win-win relationship, and since Booking.com was the first mover in Europe, it has built a massive network of properties. That makes it the go-to site for millions of travelers who want the biggest selection of hotels, which in turn attracts more properties. That powerful network effect helps keep competitors at bay.

Booking.com’s success is a big reason that Priceline Group’s profits have grown so quickly. Over the last five years, profits have compounded at more than 20 percent annually. Better yet, analysts are currently projecting more than 16 percent growth annually over the next five years.

Priceline’s forward-looking price-to-earnings (P/E) ratio near 18 might not seem “cheap,” but it seems a fair price to pay for a wonderful business that’s poised for prosperity. (The Motley Fool owns shares of and has recommended Priceline.)

Ask the Fool

Q: What happens to my cost basis in a stock when the stock splits 2-for-1? - D.T., Walnut Creek, California

A: Your basis also splits 2-for-1. Imagine that you bought 100 shares of Acme Explosives Co. (ticker: KBOOM) for $50 each, paying a $10 commission. Your cost basis is $5,010 - or $50.10 per share. After the split, you have 200 shares and your basis is still $5,010, or $25.05 per share. Always add the purchase commission to your cost basis and subtract the sale commission from your proceeds - you’ll save a few tax dollars that way.

If you’re paying much more than $10 per trade in commissions, you might want to find a less expensive brokerage. Learn more at sec.gov/answers/openaccount.htm.

Q: What is a stock’s “multiple”? - S.G., Elkhart, Indiana

A: A “multiple” usually reflects a stock’s price being compared to something. The most common multiple is arguably the price-to-earnings (P/E) ratio, arrived at by dividing a stock’s current price by its earnings per share. Imagine Sisyphus Transport Corp. (ticker: UPDWN), a company trading at $60 per share. If it earned $3 per share over the past year, its P/E is 20 (60 divided by 3). You can refer to it as trading at an earnings multiple of 20.

If you read analyses of various companies, you’ll see references to price-to-sales multiples, book-value multiples, cash-flow multiples and more. It’s instructive to compare a company’s multiples with those of its peers, to see whether its stock appears to be undervalued or overvalued. Target, for example, recently sported a P/E of 12.4, while Wal-Mart’s was 14.7. That suggests Target is the better bargain, though of course you’ll need to study it more closely.

My Dumbest Investment

I’ve had some bad results in my investing, but the most annoying mistake I made happened when I first started. I bought one share of stock in each of four companies. That was all the money I had at the time. Years later, the stocks were way down, and I no longer wanted to even own them. Making matters worse, the commission fees of buying and selling one share amounted to more than the cost of the share.

I really want to yell at anyone who recommends buying just one share of stock in order to get into investing. - F.D., online

The Fool responds: It’s important to pay attention to the commission fees you pay. These days plenty of good brokerages charge $7 or $10 or less per trade, but commissions of $25 or more haven’t been that uncommon in years past. If you buy $100 worth of stock and pay a $25 commission, you’re forking over 25 percent of the value of your investment just in commissions. We suggest paying no more than 2 percent, so if you’re paying $10 per trade, you’ll want your investment to be worth at least $500.

Still, despite all that, it’s not the greatest crime if you pay a few $10 commissions to buy a few shares of stock to get you started. Keep up with your holdings over time, too. When you no longer have faith, sell.