Priceline Earnings: Let Calls Name Your Price

by Joseph Hargett | May 9, 2012 9:28 am

Name-your-own-price online travel company Inc. (NASDAQ:PCLN[1]) will face high expectations when it steps into the earnings confessional this afternoon. Wall Street analysts are expecting first-quarter earnings to rise 48%, to $3.94 per share, from $2.66 per share in the same quarter last year.

Furthermore, the “whisper number” is even higher — $4.31 per share. That said, Priceline has easily bested the consensus estimate in each of the prior four reporting periods, with an average upside surprise of 9.6%, placing the whisper number well within reach.

Technically speaking, PCLN has risen 11.4% since its last earnings release, despite considerable market headwinds. The shares are currently in the process of testing support at their 50-day moving average, located near $705. That said, PCLN has logged an impressive 2012 so far, gaining over 50% since the start of the year.

Sentiment among brokerage firms is extremely bullish heading into the quarterly report. Data from Thomson/First Call indicates that PCLN has attracted 19 “buy” ratings, just three “holds” and two “sells.” However, there’s room for improvement as the average 12-month price target of $800 represents a modest premium of about 11.7% to Tuesday’s close. While there’s little room for upgrades, there is the potential for price-target increases.

Options traders, however, appear to be leaning toward a post-earnings decline for PCLN. Currently, there are 7,926 put contracts open in the weekly May series of options, compared with 7,666 call contracts open. As a result, PCLN sports a bearishly skewed weekly put/call open interest ratio of 1.03. That said, I would argue that a dose of pessimism from speculative investors is healthy for PCLN. Plus, many of these puts could have been purchased as portfolio protection against a potential post-earnings dip.

Traders looking for a pre-earnings strategy for PCLN might want to consider a bull call spread. Weekly options are pricing in a post-earnings move of about 8.9%, meaning that a weekly May 715/750 bull call spread stands a pretty good chance of realizing a profit. At the close of trading on Tuesday, this spread could have been had for an ask price of $16.60, or $1,660 per pair of contracts.

Breakeven for this trade rests at $731.60 — a 2.15% gain from Tuesday’s close. The maximum potential profit (at expiration) comes in at $18.50, or $1,850 per pair of contracts, and is achieved if PCLN closes at or above $750 by the end of the week.

Joseph Hargett holds no open positions on any stocks, securities, or options mentioned above, nor does he have plans to enter such a position in the next 72 hours.

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