PCLN Trade Update

by Dan May 6, 2011 9:45 am • Commentary

Stock is unchanged after reporting a strong qtr and giving solid guidance (which if I were long I would be a little worried)……..Both trades suggested (below) were intended for the stock to achieve the implied move (which I deemed to be priced cheaply), one lower and one in either direction.

Both trades are going in the absolute wrong direction and given that they were expressed through the May6 weekly options expiring today on the close, neither are looking very promising.

-I will note that Goldman Sachs downgraded the stock this morning from BUY to Hold, excerpts below:

In our “Re-sizing the OTA opportunity” piece, we concluded that Priceline would decreasingly benefit from the dual tailwinds of market share gains and online hotel bookings penetration growth in Europe, as Priceline’s market share of online leisure hotel bookings in Europe was approaching 50%, up from 10% in 2006. Given 2Q international bookings growth guidance (ex-FX) of 56% at the midpoint, down from roughly 80% yoy growth in 1Q, we now see this deceleration coming earlier than we originally anticipated. Additionally, with guidance using $1.48 for the Euro vs. GS Economics Research 12-month forecast of $1.50, we do not believe that there is much more upside to Priceline earnings from FX.

We still view Priceline as our favorite OTA and believe that growth in
APAC and LatAm could partly compensate for deceleration in Europe.
However GDP (and thus the travel addressable market) in South East Asia and LatAm are less than half of the GDP in either the US or Europe.

As a result, we are maintaining our $600 6-month price target despite
raising our 2011-2013 EPS estimates by 2-3% due to the 6% EPS beat in 1Q and the higher euro. Our new 2011-2013 EPS estimates are now $20.09/ $26.00/$31.00. At $600, Priceline shares would trade at 23X our 2012 EPS estimate, implying a 1.3X PEG on our 2012-2015 EPS growth rate of 18%.


UPDATE May 5, 2011 at 10:45am: If you are interested in trading this name today USE LIMITS, the weekly options are very wide…..the Put SPread that I detailed below is 2.40 at 6.40, DO NOT USE MARKET ORDERS, BID FOR SPREADS LIKE THESE. See update on implied move and new trade to BUY THE MOVE below.

EVENTPCLN reports Q1 tonight after the bell.

-Options market is pricing ~9% move vs the 8 qtr average move of ~9.5%.

-stock is up almost 160% in a year and most if it’s 34% ytd gain has come since late February when the company missed on revenues for 4Q10, but beat on EPS and raised guidance for the current qtr.  Consensus estimates for the current qtr are actually higher than where the company guided to in February.  Much of PCLN’s upside is being driven by expansion in Europe where their penetration is lower than that of the U.S. and areas of Asia where their emerging middle classes are traveling more.  Around 30% of PCLN’s gross bookings come from the U.S., so this is definitely a global expansion story.


-analyst community overwhelmingly positive with 16 buys and only 4 holds, and no sells.

-short interest has crept this year to approximately 8% of the float.

Expectations are certainly high heading into the report……..stock is trading within a few % of its all time highs and has massively outperformed the overall market and peers such as EXPE (which is flat on the year.) The stock could be set up for a pull back, even on good news.

Citi, which rates the stock a Buy with a $610 twelve month price target, had the following to say in their preview yesterday:

Our PCLN fundamentals call for Q1 is mixed – We anticipate that Priceline’s FX adjusted Y/Y Gross Bookings growth rate will roughly stay flat in Q1 vs. Q4’s 48% Y/Y increase………we anticipate PCLN’s EBITDA margin (as a % of Gross Profit) to be down 240 bps Y/Y to 32.6%, with Online Advertising and Personnel opex driving the deleverage as Priceline looks to aggressively expand its International operations.

Mixed read-throughs from Expedia’s Q1 results – 1) We believe solid Q1 International Bookings result by EXPE continues to reflect Online Travel Agency market share gains vs. direct suppliers & offline travel agencies rather than vs. PCLN; 2) We believe relatively weak Domestic Bookings results by EXPE (+4% Y/Y) creates a modest headwind for PCLN’s domestic Air business (because of the dampening demand impact of rising airfares); and 3) EXPE’s commentary related to “low-single digits” impact in Q1 and Q2 due to Japan Tsunami & Middle East conflict make it likely that PCLN will have to call out the impact in its Q2 guidance.

MY VIEW: Stock is priced for perfection, even though the stock isn’t exactly expensive, with a forward PE of ~25. The company is expected to grow EPS and sales ~37% and 33%…..Street is likely to overlook any near term disruption as it relates to situation in Japan and Middle East,  but will be very focused on international trends into what should be a seasonally strong q2/q3 and the costs associated with such growth.  Any hiccup to the 2011 guidance or the hint of slowing international growth will have investors re-evaluating the multiple on the stock.  This is not a stock you want to mess around with as an outright short expressed through the equity, this has been a losing proposition for years. But, you can trade it tactically from the short side through the options market and define your risk.



Buy the May6 Weekly 510 /490 Put Spread for ~4.00

-Buy May6 wkly 510 Put for ~7.00 and

-Sell May6 wkly 490 Put at ~3.00

Break-Even on May6 weekly expiration (tomorrow):

Upside: stock btwn 506 and 510 lose up to 4.00, Worst Case stock above 510 and lose 4.00 less than 1% of the underlying,

Downside: stock btwn 506 and 490 make up to 16, Best Case, stock is 490 (down ~9%) and you make the full 16.00.

TRADE RATIONALE: I want to isolate the implied move and look for a structure with a favorable payout ratio…also want to define my risk. As noted above, short interest is very high at almost 8% of the float and any news perceived as positive could cause a massive short squeeze (see AMZN‘s response last week to mixed results).  You do not want to be outright short a stock like this.

2. TRADE BUY the MOVE if you think the Implied move is cheap….

PCLN (stock ~535.00) BUY the May6 wkly 535 Straddle for ~38.00

-Buy May6 wkly 535 call for 19.60 and

-Buy May6 wkly 535 Put for 18.40

Break-Even on May6 wkly Expiration:

The  implied move is about 7% now (take the May weekly straddle, offered at 38.00 with the stock around 535.00.  If you were to buy that your break-even on the upside is 573.00 up about 7% and the break-even on the downside is 497.00 down about 7%.

-if stock is 535 tomorrow on close you lose full 38.00, if btwn 497 and and 573 u lose up to 38.00,, but the likelihood of one of those options that you are long not being in the money is very slim in my opinion so you probably wouldn’t lose all 38.00.


If you are inclined to think that the move is being mis-priced and you don’t have conviction on direction, but you do think it will move this is one way to play.   High risk of losing much of the premium if the move under-performs…risk what you are willing to lose.