Take a Long Trip with Priceline

Take a Long Trip with Priceline

Posted On February 5, 2015 2:15 pm

Shares of Priceline could be poised to fly higher as it cements its position as the destination for online travel.

Since its initial public offering during the height of the dot.com bubble in 1999 Priceline (PCLN) has certainly been on a long strange trip during its 15 year history. Gone are the days of the profitless pioneer whose “name your own price” seemingly applied to both its business model and its stock price which soared untethered by any normal metric before and ultimately crashing back to earth.

It is now the mature $55 billion gorilla in the online travel and leisure industry that turns a steady profit and offers solid growth at a reasonable valuation. It now trades at just 16x earnings even as it is expected to show 22% growth in profits when it reports quarterly results on February 19th.

The stock has sold off some 30% since its summer time as many of the other internet highflyers such as Netflix (NFLX) and Amazon (AMZN) fell out of favor. But as those names have recovered back to highs Priceline may now be poised to regain its mojo. Lower fuel costs and recovering economies are spurring travel and leisure spending in both the U.S, and Europe.

The chart recently held important support at the $1,000 level creating a double bottom. It now offers a good entry point for run back above the $1,100 level.

PCLN 050215

Bigger Than Its Name

The company has grown well beyond its name and simply and way to shop for plane and hotel rates. The company is now a full travel and leisure company to include car rental, dining and even insurance services that which covers 190 countries and generates over $8 billion in annual revenue. It owns and operates various brands such Booking.com, which dominates Europe and Agoda, which dominates the Asian market.

Its recent purchase OpenTable positions it to become the premier restaurant reservation service in which it can employ its dynamic restaurant business. Imagine in large cities ff menu prices were to adjust upward or downward depending on the time of the reservation, restaurants would be able to command higher prices at peak times and offer customers lower prices at non-peak times. The result would be increased revenue for the restaurant. It also means shorter wait times and more access for customers leading to reinforcing network effect.

This is the strategy that is already employed by airlines and hotels and is crucial part Uber’s s pricing model. This would create a very attractive value proposition for restaurants.

Priceline has proven it can successfully integrate and expand across these various platforms and by offering a full suite of travel related services it helps other booking sites such as Expedia (EXPE). Expedia actually reported earnings on after the close on February 5th and disappointed sending its shares some 7% lower. This weakness is spilling into Priceline’s stock which is down in sympathy setting up good opportunity ahead of its own upcoming report.

I think Priceline’s dominate market share and synergies across its portfolio of hotel, airline and car rental services will help it deliver better than expected results and propel the stock higher. I want to get out ahead of that event and establish a bullish position.

The Trade:

Given the stock’s high dollar price using options to leverage our capital makes good sense. To further reduce the cost and mitigate the impact of time decay and the decline of implied volatility that will occur following the earnings report I want to use a spread with an expiration date at least 60 days beyond the February 19th release date. My recommendation is:

Buy the April $1040/$1080 call spread for a $13 net debit for the spread.

I have a target of share of Priceline climbing back to the $1,080 level by the April 17th expiration date. I would like to take profits if the spread doubles in price to $26 any time prior to expiration.

To limit losses I would set a stop loss if the value of the spread declines below $10 at any point prior to expiration. That gives us an attractive 4:1 risk reward ratio.

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.