Priceline – Ready to Rebound
Can a very high-priced share still be a bargain?
Online travel agency Priceline (PCLN, Financial) has been as reliable a grower as almost any stock out there. The firm’s balance sheet is solid. The stock registers in the top 1% of the 1700 companies Value Line's main research universe, in terms of long-term appreciation.
Priceline's blend of outstanding fundamentals plus a high beta allow for good entry and exit points for those wanting to play with these shares.
Priceline is a pure play on the overall worlwide increases in travel via direct, customer-initiated (internet) bookings. Their 10-year numbers reflect the very favorable trends.
Somewhat surprisingly, when considering all-time record results, PCLN had drifted down from a 2014 peak of $1,379 to under $1,000. The Jan. 16, 2015, low also established a new 52-week nadir, at $990.61.
It is easy to get a bit foggy when dealing with absolute share prices this high. Refocus on valuation by looking at Priceline’s historical P/Es at key ‘best buying opportunities".
Friday’s new low put PCLN at its best (lowest) valuation since 2010, just before a less than one-year, 224% run higher. The late 2011 sell-off preceded a quick rebound from $402 to $775. The 2012 pullback to $554 turned out to be a base for the run to almost $1,400.
The two periods when PCLN paused each came from somewhat overvalued territory, at about 25x and 26x what were then current year EPS.
Priceline’s present-day multiple is just 16.5x expected 2015 EPS of $61.05. It was greater than 17x at each of the two most recent previous launching points.
PCLN’s very steady, post-recession average valuation, has run 20.7x. A return to that level would support a 12-month goal price of $1,264.
Better than 25% upside, on a proven growth stock, at a below market valuation is a good thing. Deep-pocketed option writers can capture significant dollar premium by selling a PCLN Jan. 20, 2017, $1,000 put @ $150 per share.
I was able to do exactly that with the stock trading for $1,006.43.
The "if exercised" price drops all the way down to $850 ($1,000 strike price - $150 put premium). If the 2015 estimate proves accurate, the worst-case scenario would leave me forced to buy 100 PCLN at less than 14x earnings. Priceline has not changed hands as low as $850 for more than 18 months (see chart). It spent greater than 99% of the past 14 months above the $1,000 mark.
Selling this put was like “naming my own price” at $850 a share.
The best-case outcome merely requires PCLN to hold above that same $1,000 level on the option’s expiration date in January 2017. By 4 p.m., Priceline had closed at $1,008.22, already placing it above the minimum price needed two years out.
Maximum profit is capped at 100% of the premium collected. In this case, that is a hefty $1,499 after commission.
Please note that each contract sold represents a potential net purchase of $85,000 worth of shares. This option trade is not appropriate for small accounts.
Think dollars and not 100 shares. Think value instead of price. Even moderate-sized accounts can own Priceline. If you are reading this article, it is likely you could afford to own a few shares at a net cost of $1,000-5,000.
If PCLN moves up, as expected, you will still net 25% or better even if you only purchase 1 to 5 total shares.
Disclosure: Short 1 PCLN Jan. 2017, $1,000 put
