PCLN Q1 Earnings Preview

by Enis May 7, 2014 12:59 pm • Commentary

Event:  PCLN reports its Q1 earnings tomorrow before the open (the company has changed its earnings report from the afternoon to the morning).  The options market is implying about a 5.25% one day move, which is above the 4 quarter average of 3.75%, but below the 8 quarter average of about 6%.

Sentiment:  Wall Street analysts remain extremely bullish on PCLN, with 25 buys, only 4 holds, and no sells.  The average price target is $1470, which seemed close when the stock was trading $1370 in March, but seems far away now that the stock is trading around $1140.  Despite that 17% selloff, PCLN is only down 2% in 2014, and up more than 50% since last May.  Short interest is around 2.5% of the float, near 5 year lows.

Options Open Interest:  Total open interest is skewed towards calls, with a call to put ratio of about 1.3 to 1.  The one month average daily volume has also slightly favored calls by a ratio of 1.25 to 1.

There are only three strikes near current spot that have over 2k of open interest:

-May17th 1050 puts

-May17th 1200 calls

-July 1200 calls  

Price Action/Technicals:  PCLN has sold off to near its 200 day moving average today for the second time in the past 2 weeks.  The 200 day ma is currently around $1120, and has not been breached since January 2013:

[caption id="attachment_40132" align="alignnone" width="600"]PCLN daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg PCLN daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]

The 50 day ma is also downward sloping for the first time since 2012, and comes into play around $1240.

The $1120-$1240 area is the neutral area, while sellers will be in firm control on a break below $1120, and buyers will regain control on a break above $1240.

Fundamentals/Valuation:  Analysts are very positive on the stock, and this summary from GS research is a good example of the bullish case:

We expect Priceline to report 1Q14 gross bookings of $12,500mn (+36.6% yoy) when it reports on Thursday, May 8, BMO, above the high end of guidance at $12,173mn and consensus at $12,033mn. We are also ahead on gross profit at $1,363mn (+35.0%) and on adjusted EBITDA at $476mn (28.0% margin, +29.4% yoy) (Exhibit 1). We believe PCLN benefited from accelerating European ADRs and continued share gains in the US. While room night growth at Expedia and Orbitz benefited from new partnerships, we expect to see a similar trend in Priceline’s results. With accelerating growth across all major an improving macro environment, and the stock trading at a discount to the sector despite faster growth, we continue to believe the risk/reward of owning PCLN is amongst the most attractive in our coverage.

At a P/E of 31x, and expected sales and earnings growth of 20-25% for the next 3 years, PCLN does indeed look much more attractively valued than the vast majority of the internet sector.  However, that relative valuation has not saved the stock from the recent momentum stock selling spree.

PCLN is certainly one of the few internet names that looks decent on a pure fundamental  valuation perspective.  In addition, management has shown an ability to execute.  Perhaps the only point of caution, besides the technicals, is that the company is now a $60 billion market cap, so sustaining incremental growth becomes more difficult with each passing year.

Volatility:  Implied volatility in PCLN is higher today than at any point in the past year, due in large part to the broader selling in Nasdaq stocks:

[caption id="attachment_40134" align="alignnone" width="600"]PCLN 30 day implied volatility, Courtesy of Bloomberg PCLN 30 day implied volatility, Courtesy of Bloomberg[/caption]

We would expect implied volatility to settle in higher than 25 after this earnings event given the realized volatility in the stock over the past couple of months, without earnings.

Our View:   PCLN has risen after earnings on each of the past 6 reports.  In many cases, that rally came after the stock rallied into the report as well.  This time around, the stock has sold off substantially into the event.  If PCLN beats as usual, perhaps the stock has a decent potential bounce in it. There’s also the chance that they announce an intention to split the stock as others like AAPL have recently done. This would most likely help the stock as it did with AAPL.

BUT, the overall environment for internet stocks is quite weak.  A bounce is likely to be sold, even if the news is good.  More concerning to us, and why we won’t play for a bounce in PCLN on earnings, is that if the stock does not react well to the report, a break of the 200 day ma on the downside could lead to much more aggressive selling from long-term trend followers and long holders.

When the dust settles on the momentum selloff (which might not be for a few weeks to a few months), PCLN is definitely worth a look on the long side.