$PCLN Q4 Earnings Preview

by Enis February 19, 2014 9:57 am • Commentary

Event:  PCLN reports its Q4 earnings, Feb. 20th, after the close.  The options market is implying about a 6% one day move, which is above the 4 quarter average of 3.75%, but below the 8 quarter average of about 6.5%.  PCLN has moved higher on the past 5 earnings releases.

Sentiment:  Wall Street analysts have been quite positive on PCLN throughout the stock’s 85% return over the past year. There are 27 buys, 4 holds, and 0 sells on PCLN, with an average 12 month price target of $1364.  Short interest in PCLN is quite low, at around 1.5% of the float, its lowest level of the past 10 years.

PCLN has gone up almost twenty-fold in the past 5 years, going from around a $4 billion market cap in early 2009 to a $67 billion market cap today.

Options Open Interest:  Despite the massive run higher in PCLN shares, open interest still slightly favors puts to calls, by a ratio of about 1.1 to 1.  Calls have been a bit more active than puts over the past month, though just by a touch.

Not surprisingly, the strikes with the most open interest across maturities are the round numbers.  In Feb, the 1200 and 1300 calls are the lines with the most open interest among nearby strikes.  The April 1200 calls have over 2k of open interest, the largest among strikes within $100 of current spot.

Price Action/Technicals:  PCLN is one of only a handful of internet stocks that IPO’ed during the internet bubble and rose to a ridiculous valuation, and has since been able to surpass its bubble high.  That new all-time high occurred last year, after more than a decade of gradually rising from the ashes of the internet bubble:

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

The $1000 level is now crucial long-term support after last fall’s breakout.  Meanwhile, on the shorter-term daily chart, the 100 day moving average was around the $1100 level on the most recent selloff in February.  That’s where the stock found support before rocketing higher in the past 2 weeks:

PCLN daily, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, Courtesy of Bloomberg
PCLN daily, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, Courtesy of Bloomberg

The breakout above the $1200 level that was resistance in Nov, Dec, and Jan means that’s the first line of support.  In reality, it’s easy to remember support in PCLN – 1200 is first support, 1100 is next support, and 1000 is big support.  No major resistance with the stock at all-time highs.

Fundamentals/Valuation:  The secular trend of the travel booking industry moving online has been much bigger than investors expected just 5 years ago.  Priceline hit another new all-time high this month, but so did EXPE and TRIP, after both reported better-than-expected earnings numbers in the past couple weeks.  

Continued industry growth has investors excited for the sector’s bellwether – PCLN.  PCLN has grown earnings at more than 30% per year for the past 10 years, with no hiccups in the process!  That’s astounding earnings growth, and the stock has appreciated in tandem.

Analysts still project 20-25% annual earnings growth over the next few years, still quite impressive, especially for the larger PCLN of today.

At a 37x P/E multiple, PCLN is by no means cheap.  20% earnings growth is likely not going to be enough to boost the stock over the next year.  So the market is likely expecting better numbers, especially since PCLN has beat for 5 straight quarters.  PCLN’s one advantage has been the improvement in the European travel market, where PCLN gets more than half of its revenues.  Regardless, the market expectations are high, so PCLN will have to continue to deliver beats and guidance for the strong uptrend to continue.

Volatility:  30 day implied volatility in PCLN is right back to the high 30’s, where it has been for the past 4 earnings events:

Screen Shot 2014-02-19 at 4.54.02 AM

Even though PCLN has almost doubled in the past year, the stock has moved higher in a very gradual fashion in that period.  30 day realized volatility has rarely been above 30 the entire time.  As a result, we would expect implied volatility to fall back into the mid-20’s after the event.

Our View:  Prior to PCLN’s November earnings report, we actually put on a short volatility trade that we quickly took off for a winner.  The reasoning was that expectations in PCLN were high, but that the stock was likely to report better-than-expected results given the prior reports in the sector.

The setup this time around is similar, but the stock is at an all-time high, which we view as a more dangerous position for a volatility sale strategy, since the stock has no upside resistance.  We will look at potential trades today and tomorrow, and post our trade thoughts as well.