$PCLN Q3 Earnings Preview

by Enis November 6, 2013 2:49 pm • Commentary

Event:  PCLN reports its Q3 earnings on November 7th, after the close.  The options market is implying about a 6.25% one day move, which is above the 4 qtr avg of about 4.5%, but below the 8 qtr avg of about 7%.

Sentiment:  Wall Street analysts are very positive on the stock, with 25 buys, 5 holds, and no sells, though the average 12 month price target of around $1131 is less than 5% above current spot (mainly due to the speed of the stock’s rally).  Short interest is at its lowest level of the past 5 years, at around 4% of float.  The stock is up 75% in 2013.

Options Open Interest:  Open interest is slightly skewed towards puts, by a ratio of 1.1 to 1, despite the huge run higher in the past year.  The past 1 month volume has been skewed towards calls, however, by a ratio of about 1.1 to 1.  The Nov15th 1100 calls have more than 1k of open interest, the highest among near-term maturities.  Farther out, the Jan14 960 calls have 2900 of open interest.

Price Action / Technicals:  For more than a decade, PCLN’s all-time high was 990, set on April 30th, 1999. The stock finally broke above its 1999 high on its August earnings report, opening on August 9th at 992.03.  The volume on August 9th was the largest single day share volume in PCLN since its August 2012 earnings gap lower (and almost equivalent in notional terms).

So the $950-$1000 area is crucial long-term support going forward for PCLN.  Here’s the monthly chart:

PCLN monthly chart, Courtesy of Bloomberg
PCLN monthly chart, Courtesy of Bloomberg

Zooming in to the daily chart, the stock has remained above its 50 day moving average since its earnings report in early May.  It’s been a very clean uptrend with higher highs and higher lows ever since:

PCLN daily, 50 day ma in pink, Courtesy of Bloomberg
PCLN daily, 50 day ma in pink, Courtesy of Bloomberg

The 50 day ma currently comes in to play around $1015.  The stock basically has no resistance, as the all-time high from 2 weeks ago was set at $1098.70.

Fundamentals/Valuation:  On the valuation front, what I wrote about PCLN in our preview prior to last  quarter’s report essentially holds true today:

Though PCLN’s stock move higher has been an amazing run, the company has actually been growing earnings at a blistering pace to justify the stock’s move (a rare occurrence in this market).  The trailing 12 month P/E is in the same place it was in mid-2010, mid-2011 and mid-2012, right around 30:

5 year chart of trailing 12 month P/E in PCLN, Courtesy of Bloomberg

5 year chart of trailing 12 month P/E in PCLN, Courtesy of Bloomberg


After the stock’s move higher since last earnings, the trailing 12 month P/E is up to 34, but still not expensive if the stock can deliver the 20-25% earnings growth projected by analysts over the next 2 years.

So the pivotal issues for PCLN are execution and expectations.  The 3rd quarter is the seasonally strongest for PCLN (European holiday season, and more than half of PCLN revenues are from Europe).  The consensus estimate is at $16.22 in EPS for Q3 2013, compared to $12.40 in actual EPS in Q3 2012, and $9.70 in EPS in Q2 2013.  So analysts are expecting 31% year-over-year earnings growth for this crucial quarter.  That’s a pretty high bar.

One recent positive was Expedia’s better than expected earnings report for Q3 (1.43 vs. 1.36 expected EPS, $1.4b vs. $1.38b expected on revs) with international bookings leading the growth in the quarter.  If that’s indicative of overall strength for the sector last quarter, then PCLN could deliver another beat.

BUT, we’ve seen many of the year-to-date winners in 2013 sell off on Q3 earnings even after strong numbers.  So overall expectations/positioning might temper any gains on the upside.

Volatility:   30 day implied vol in PCLN is back in the high 30’s, where it has been prior to its previous earnings reports in 2013:

30 day implied vol (red) vs. 30 day realized vol (blue) in PCLN, Courtesy of LiveVolPro
30 day implied vol (red) vs. 30 day realized vol (blue) in PCLN, Courtesy of LiveVolPro

Implied vol should fall back in the low 20’s after the event.  Realized volatility has not been above 30 for the entire year, but options are priced more expensive with the outlier risk of a big move in mind.

Our View:   PCLN has been a major winner, but the stock’s gains have been underpinned by very admirable earnings growth.  The company has become THE travel behemoth in the online space, and has reaped the rewards as a result.

While earnings expectations are high (16.22 in EPS consensus), EXPE’s recent strong result and PCLN’s record of executing suggest that the company could still jump over that high bar.  However, we’ve seen a streak of high fliers in 2013 report decent numbers but still sell off after earnings.  That clean-up in positioning seems could be the main risk to PCLN after this quarter’s report.  The $990-1000 area is strong support, though, and we’d be surprised if that was breached.

It’s certainly tempting, given the dollar amounts of the options to do a short premium trade. For example, straddles in Dec are $100. That seems like alot of room in a $1000 stock.