PCLN Q3 Earnings Preview

by Enis November 1, 2012 12:30 pm • Commentary

Event: PCLN reports fiscal Q3 earnings tonight after the close.  The options market is implying about a 8.5% move, vs. the 4 qtr avg move of 9.25% and the 8 qtr avg move of about 8.25%.  

Sentiment: Despite the stock’s recent 20% selloff, Wall Street analysts have remained mostly positive on the stock with 20 Buys, 7 Holds and no Sells (compared to 21 buys, 4 holds, and no sells before last quarter’s report), with an avg 12 month price target of about $711.  The stock has had relatively stable short interest around 5% of float, for the past 3 months.

Price Action:  Stock had a huge start to the year, and is still up more than 25% ytd, despite trading more than 20% below its April high close to $775, which happened to be a 10 year high for PCLN (all time high is 990, 2 months after its IPO in 1999)

Fundamentals:   An interesting dichotomy has opened up between PCLN and EXPE.  Expedia is still near the highs of the year, after another strong earnings report on Friday.  At first glance, Expedia’s advantage might seem to be that it is 60% domestic, 40% international, while PCLN is 40% domestic, 60% international.  But Expedia’s international business grew revenues 22 percent, while domestic revenue grew 14 percent.

In fact, though PCLN cited weak European bookings as a problem on its second quarter earnings release, its international bookings are actually expected to grow 12-20%, while domestic bookings are expected to grow around 5% in the third quarter.  The international business is obviously the key.

Valuation:  The P/E multiple has contracted almost 50% in the last year and a half, as this 7 year chart of P/E shows:


Valuation looks on the low end of the recent range, which is a bullish argument.  But projected earnings growth over the next 2 years, if it matched current analyst estimates of around 20%, would also be the lowest earnings growth for the company in the past 10 years.  Incredibly, PCLN actually grew earnings on average 45% during 2008 and 2009!

So this is an exceptional company, but the stock got ahead of itself at the start of this year.  However, if the company does actually grow earnings 20% over the next 2 years, a 24 P/E is not expensive, particularly relative to comparable names in this market.  The crux of the thesis is whether Earnings growth does indeed match those expectations.


There is one level of significant technical importance, and that’s $550.  Here is the 3 year chart:


550 was resistance last year, and has been support this year.  Any breakdown below there puts the long-term trend in question, but until it’s broken, it’s a level against which to play for a bounce.

Volatility:  As one would expect with only 1 day of trading following earnings the Nov2 weekly’s vol is massive, especially considering PCLN is a 580 dollar stock (the higher the spot price the lower vol tends to be, for reasons both mathematical and psychological) Vol in the weeklies is 160+ while Nov regular is 54 and Dec 38. The average across all months is 50 which comes in at the average to high range of earnings announcements, with the only time it was substantially higher being last October at 60. Here’s the HV and IV over the past 2 years:

IV vs HV from LiveVol Pro

Expect Nov and Dec vol to come into the low 30’s following the report.


MY VIEW:  My first inclination is to play for a bounce off of the $550 support level.  But I’m concerned that PCLN has become a broken story, similar to CMG, where company trends have turned negative, and in each subsequent quarter, the company is playing catch up to meet already lowered expectations.

Having said that, I do think the risk/reward favors the long side, but I haven’t decided whether there is an optimal options structure to take advantage of that view.  We are still looking, and if we find a standout trade, we will post in the next couple hours.