Priceline has been in the doldrums for much of the past year. The stock was a bull market leader throughout 2009-2013, but has been missing from the leader board in 2014. Even with the Nasdaq’s rally at the end of last week, PCLN is back to testing the crucial $1100 support level that has held throughout 2014:
The stock actually reported a decent result in mid-August, but after the initial 2% pop, PCLN has been in a nearly straight line descent lower.
Back in early August I laid out a Name That Trade idea for PCLN ahead of the earnings event, with the following thoughts on the fundamental situation:
Priceline is very exposed to Europe, where it gets more than half of its revenues. A downtick in travel growth in the region in 2011 during the sovereign debt crisis hindered some of PCLN’s profit growth at the time. Given the serious geopolitical risks in Ukraine, Russia, and the Middle East, a cutback in travel would not be surprising.
Having said all that, PCLN has generally executed very well, consistently beating consensus expectations and growing EPS at 30%+ per annum on sales growth of 20%+ per annum. Yet, it seems logical that 20%+ sales growth for PCLN from its current base of $7 billion in annual revenues would be more difficult than 20%+ sales growth from its $3.5 billion base 3 years ago. Add to that the MA warning, and the fact that the third quarter (July to September) is the most important from a seasonal perspective for PCLN, and the risks seem tilted to the downside for the early August earnings report.
I wish I had traded the put butterfly idea that I detailed in that post, but I stayed away mainly because of the continued strong uptrend in the Nasdaq this summer.
Given that the third quarter is the most important for PCLN from a seasonal perspective (it’s expected to account for 40% of the year’s EPS in 2014), the early November earnings report is going to be crucial. Perhaps some of the recent weakness is on continued concern among investors that the geopolitical issues globally could impact PCLN’s results.
There are two other headwinds for PCLN for the upcoming quarter. First, the strength in the U.S. dollar is a negative for the company since it only gets about 35% of its revenues from the U.S. Here was management’s commentary on the most recent conference call about the impact of a stronger dollar:
We have hedged contracts in place to substantially shield our third quarter EBITDA and their earnings from any fluctuation in the Euro or pound versus the dollar between now and the end of the quarter, but these hedges do not offset the impact of translation on our gross bookings, revenue, gross profit and operating income and don’t hedge our earnings beyond the third quarter.
In other words, analyst estimates are likely too high considering the move in the dollar in the past month.
Second, the competitive landscape for PCLN continues to be a headwind, as online travel has become a crowded space. PCLN has some significant advantages and a diversified lineup of brands, but margins are likely to be pressured going forward nonetheless.
The one positive is that the stock’s decline has made valuation more reasonable, though the real crux for the investment thesis is going to be the continued earnings growth. In that regard, the test of the $1100 support level in the short run is likely a vote among traders as to whether PCLN can meet expectations for Q3 in its November report. A failure here would signal significantly lowered expectations for next month’s release.
At this juncture, after a 15% selloff from the post-earnings high in mid-August, I don’t have a strong view on the stock. But it’s an interesting name to watch as a former bull market leader near yearlong support.