$PCLN Q3 Earnings Cheat Sheet

by Enis November 3, 2014 10:26 am • Commentary

Event:  PCLN reports its Q3 earnings tomorrow morning, Tuesday, Nov 4th, before the open.  The options market is implying about a 4.5% one day move, which is above both the 4 quarter average of 3% and the 8 quarter average of about 3.75%.  PCLN has moved higher on 7 of the past 8 earnings releases.

Sentiment:  Wall Street analysts have remained positive on PCLN throughout 2014, even as the stock has stagnated. There are 27 buys, 4 holds, and 0 sells on PCLN, just as there were prior to the February earnings report.  The average 12 month price target is 1479, nearly 25% higher than the current level.  Short interest in PCLN is quite low, at around 2.25% of the float.  The stock is up 2.5% year-to-date.

Options Open Interest:  Both total open interest and recent options volumes have been nearly evenly split between puts and calls.  That’s one more indication of the rangebound price action in PCLN over the past year.

The Nov 1200 call line has over 1k in open interest, and the Jan15 1300 call line has over 1500 in open interest.  

Price Action/Technicals:  PCLN has recently retraced to essentially the midpoint of the 1 year range, around $1200, which happens to coincide with the 200 day moving average:

[caption id="attachment_47592" 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]

After a stellar run from 2009 to 2013, PCLN has made no progress in 2014.  It has been resilient on any moves lower, however.  The most recent decline stopped just short of $1000, which is important long-term support as well since it was the stock’s prior all-time high in 1999.

The chart still seems to suggest a range between $1100 and $1300 after the event, which is corroborated by options pricing, with implied volatility much lower than it has been ahead of earnings over the past 2 years.

Volatility:  In that vein, here’s the chart of 30 day implied volatility:

[caption id="attachment_47556" align="alignnone" width="600"]PCLN 30 day implied volatility, courtesy of Bloomberg PCLN 30 day implied volatility, courtesy of Bloomberg[/caption]

Since PCLN has moved between 2 and 3% on the past 3 earnings reports, options traders have reduced expectations for a big move ahead of this report.

Our View:  The internet sector has been under pressure ever since the BABA IPO, as Dan noted in Friday’s NTT post.  PCLN is flat since early September, but the stock’s struggles in 2014 are likely more related to its significant outperformance in 2013.  The stock has corrected through time as valuation has gradually caught up.

PCLN is now a $60 billion market cap company, so its growth heyday is likely behind it.  It has become a more diversified company as well, but still sports significant earnings growth prospects of 20-30% per year based on analyst projections.  The 3rd quarter is seasonally the most important, accounting for about 40% of the year’s total EPS.  In that context, volatility actually seems priced a bit cheaply for next week’s earnings event.  However, with PCLN right in the middle of its 1 year range, and the fundamental and technical situation relatively neutral, it’s hard to spend premium without a directional view.