MorningWord 6/22/15: Just Say the Word – $PCLN, $EXPE

by Dan June 22, 2015 9:35 am • Commentary

This is some fairly old school Wall Street sell-side research stock picking, per Bloomberg:

Priceline Cut at Deutsche Bank on Limited Upside; Expedia Upped 07:57
Priceline cut to hold from buy by Deutsche Bank analyst Lloyd Walmsley, PT to $1,325 from $1,425, citing “limited upside.”
• Says PCLN shares trade at high end of historic range, despite slowing growth, margin pressure, and rising risks from Airbnb
• Upgrades Expedia to buy from hold, PT to $130 from $95; sees shrs reaching $200/share over next 5 yrs as it executes on core business and extracts synergies from acquisitions

Wall Street equity analysts have taken their share of heat since the late 1990s due to perceived cheerleading during bull markets, failures to identify turns (both macro and micro) and an insistence on defending buy ratings once the macro environment or company specific fundamentals turn. This is all against the backdrop of inherent conflicts of interest, at least at bulge bracket banks, that when research takes a backseat to banking relationships. Why run the risk of pissing of a corporate client with a downgrade or even a sell rating?

The illusive Sell Rating. They are kind of like that Tiger Shark Steve Zissou was trying to catch in the Life Aquatic. Per Factset from April 1, 2015:

Of the 11,425 ratings on S&P 500 companies at the end of the first quarter, 48% were Buy ratings, 46% were Hold ratings, and 6% were Sell ratings.

In the above example, the DB analyst goes to the sidelines on PCLN (from Buy to Hold) but gets geeked up about EXPE, going from Hold to Buy. This is the most common form of horse-trading by Wall Street analysts.  In this situation the analyst maintains a Buy on an online travel stock and adds some value by identifying a possible bearish inflection point in PCLN and a bullish one in EXPE, and appears to offer some objectivity.

But truthfully it’s more simple than that. The year to date chart below shows PCLN in the process of breaking down and EXPE once again threatening a breakout:

EXPE vs PCLN ytd chart from Bloomberg
EXPE vs PCLN ytd chart from Bloomberg

EXPE is up 27% year to date, just last month making a new all time high rising 8% on a beat and raise. It trades at about 29x expected 2015 earnings, while PCLN is up 1% on the year, down nearly 10% from its 2015 highs. Most of the losses have come since issuing weak guidance for the current quarter last month.  PCLN trades 21x expected earnings growth of 4% on 10% sales growth.  In this case the analyst may merely be making a relative call, but it’s important to remember that most of DB’s clients who care about equity research are long stocks, and placing a Sell on PCLN would have caused the stock to decline, and possibly pissed them off. Wall Street analysts have very little incentive to ever actually say SELL.