NEW YORK (CNN/Money) -
If someone asked you how shares of Priceline.com were doing, and you hadn't seen a stock chart recently, you might guess that they'd be slumping lower with the Nasdaq and the struggling airline sector.
But shares of Priceline.com are up about 25 percent this year as a new retail service gains attention among customers and investors.
"One reason Priceline shares have been doing so well is that this new service removes a thorn in its side," said Standard & Poor's equity analyst Scott Kessler. "There was a lot of concern about its limited offerings."
Priceline originally catered to travelers seeking big discounts with an auction service that allowed customers to offer a price for an airline ticket, without knowing the time, number of stops or the airline.
The uncertainty of these "opaque" reservations and increased competition in the sector had eroded Priceline's airline bookings to 1.8 million last year, down 38 percent from 2002.
But the new retail service listing the price, time and the carrier has attracted customers looking for some more certainty in their travel plans.
"The preliminary results [of the retail service] have been positive and we believe we are starting to make progress towards stabilizing and growing total unit sales of airline tickets," the company said in its annual report.
Since it announced the new retail service at the end of 2003, Priceline (PCLN: Research, Estimates) shares have climbed steadily and are up about 24 percent this year to $22.60 a share.
This compares with a 5 percent drop for the Nasdaq, a 16 percent drop for the AMEX Airline Index, slight declines for rivals Sabre Group and Orbitz, and a 14 percent drop for rival InterActive Corp.
And some believe Priceline shares have further to run.
"I absolutely think it has further to go," said Legg Mason analyst Thomas Underwood, who has a "buy" rating on the stock. "I'd think it would be getting a little stretched out in the high $20s, $30 range."
When contacted, the company did not provide further details of the retail service, citing a quiet period before its next earnings report. Priceline is due to report results in early April.
Other improvements, same concerns
While working to stabilize its airline reservations, Priceline has continued to expand into the hotel and car rental sectors, which are growing faster and are more lucrative as well, according to J.P. Morgan's Aaron Kessler, who is not related to S&P's Scott Kessler.
"We believe that hotel reservations and rental cars now account for over 90 percent of offers booked versus 50 percent two years ago," he wrote in a recent report.
On the back of a growing hotel and car business and the new air ticket service, Wall Street expects Priceline's profit per share to jump 65 percent to 78 cents a share this year, from last year's 47 cents a share, according to research firm First Call.
That would give Priceline a price-to-earnings ratio of about 29 based on this year's forecasts, but Legg Mason's Underwood believes the company could earn up to 90 cents a share this year, which puts its P/E at about 25.5.
That's below rivals InterActive Corp. (IACI: Research, Estimates), which owns Expedia and Hotels.com, at 30 and Orbitz (ORBZ: Research, Estimates) at 26, but above Sabre Group's 2004 P/E of 18. Sabre (TSG: Research, Estimates) owns travel site Travelocity.
But the stock is volatile -- as seen in Monday's drop of some 5 percent as the AMEX Airline index fell 3.6 percent -- and may not be for widows and orphans despite its growth prospects.
S&P's Kessler has a "neutral" rating and $26 price target on the stock. "There is room for appreciation, but I don't expect it will outperform the way it has. I think it will perform in line with the S&P 500."
The company also faces a number of questions, including increased competition, increased marketing expenses and more terrorist attacks, which could further hurt travel demand.
These concerns have shown up as Priceline's stock has risen. Short interest has crept up about 2 percent over the last month, to about 15 percent of the shares outstanding, as some bears bet against the stock.
In a short sale, an investor borrows stock and sells it, hoping to buy it back more cheaply later and pocket the difference.
The relatively large short position in the stock and the positive reaction to the new retail service has forced some shorts to buy to cover their positions as the stock has moved higher, thus adding to the gains, said S&P's Kessler.
"The shorts don't bother me," he said. "In fact, the short interest gives me more incentive to be positive on the stock because if everyone were positive and there was a shift in sentiment, then there would a dramatic drop."
--S&P's Kessler, Legg Mason's Underwood and J.P. Morgan's Kessler do not own shares of Priceline. J.P. Morgan has had a banking relationship with the firm in the past year.
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