$PCLN Q4 Earnings Preview

by Dan February 25, 2013 1:50 pm • Commentary

Event:  PCLN report their Q4 earnings tomorrow night after the close.  The options market is implying about a 7.2%* move vs the 4 qtr average of ~9.5% and the 8 qtr avg of ~8.4%. (*with the stock about $685 the March 1st weekly 685 straddle is offered at about $50, if your bought that you would need a $50 move either way to make money.)

Sentiment: Wall Street analysts remain fairly positive on the stock with 20 Buys, 9 Holds and no Sell ratings with an average 12 month price target of $753.  Short interest sits at about 5.5% of the float, which is down a bit from the 52 week highs made prior to the company’s Q3 report in Nov.

Option Volume / Open Interest:  Over the last 20 days, options volume has been skewed towards calls with the avg volume of ~12k calls vs 9k puts a day, while total open interest is nearly split btwn puts and calls.

The largest lines for open interest are the March 730 calls with 1100, the March 1st weekly 730 calls with 1100 and the March 16th 700 calls with ~1k.  

Vol Snapshot:  Despite implied vol being lower than where it was prior to the last 3 earnings announcements, the spread btwn 30 day realized and 30 implied vol is a bit narrower, but that is likely the result of the across the board low vol environment we have been in ytd.   IV will likley come into the mid to low 20s following the results.

[caption id="attachment_23013" align="aligncenter" width="490"]PCLN 30 IV vs Realized, 1 yr chart from Bloomberg PCLN 30 IV vs Realized, 1 yr chart from Bloomberg[/caption]


Price Action / Technicals:  The stock is in no man’s land from a technical perspective.  Here is the 2 year chart:

[caption id="attachment_23016" align="alignnone" width="627"]2 year chart of PCLN, Courtesy of Bloomberg 2 year chart of PCLN, Courtesy of Bloomberg[/caption]

The long-term resistance is at the Apr 2012 high around 775.  The stock’s high in 2013 is around 720.  The crucial support level is at 550, from where the stock broke out in 2012.  550 acted as resistance throughout 2011, and held as support on 2 different occasions in 2012.  With notable support and resistance so far away, and the 200 day moving average essentially flat, PCLN is in the middle of its long-term range, with little indication of a bullish or bearish trend or setup.

Valuation / Fundamentals:  There were few large cap U.S. companies that showed the sort of growth that PCLN had during the financial from 2008 to the end of 2012.  PCLN’s earnings growth had been btwn 43% in 2008 and 74% in 2011, but has since seen a meaningful deceleration to 32% for 2012 and the expected 21% in 2013.  As a result of international expansion, sales have also grown impressively btwn 24% and 41% in the years btwn 2008 and 2011, but have slower to about 20%.  Continued expected growth of 20% will help maintain current valuation at about 18.3x this years earnings as investors are willing to pay a premium for a company well situated for broad geographic expansion.

My View:  PCLN appears to be priced for perfection in what could be an increasingly challenged macro environment for the coming months.  It is our opinion that the U.S. consumer is tapped and if today’s price action in Europe is a potential indication of headwinds in Europe, PCLN could be the exact sort of stock that investors hit the pause button on.  The implied move looks a tad cheap to historical, but owning premium for a move in a name like PCLN, without a move could be bone-crushing to your PnL.  We are looking for ways to play.