Saturday, December 01, 2007

A Trade on (PCLN) - Q3/07 earnings

Dear Fellow Options Traders :

Noted that (PCLN), an online travel company that provides various travel services, including airline tickets, hotel rooms, car rentals, vacation packages etc, would be reporting Q3 earnings on 8 Nov 2007 after-market-close. (PCLN) price gapping characteristics for earnings announcement has been remarkable.

On 8 Aug 2007 when PCLN reported a knock-out Q2/07 earnings beating EPS (earnings per share) estimates by 21 cents, the stock price gapped up +$12.00 to $77.00 and went up +$2.00 intra-day to close at $79.00. Similarly, when PCLN reported Q4/06 on 12 Feb 2007 beating EPS estimate by 18 cents, on 13 Feb 2007 (Tuesday), PCLN already went up +$4.27 to $50.20 by 10.00am EST.

But on 9 May 2007 (Wednesday), (PCLN) did gap down -$2.00 to $62.00 and went down intra-day another -$4.00 to $58.00 when they reported Q1/07 earnings which was in-line with a upside pre-announcement made earlier.

With an understanding that (PCLN) has good gapping range after earnings announcement, I monitored PCLN development closely towards announcement day. From, I noted a number of target price upgrades by research analysts. On 8 Aug, PCLN announced the "Name Your Own Price" and "Published-Price hotel services". From what I've read, I was most confident of's robust growth in the European online travel market and felt that it should provide a positive impetus to their Q3/07 earnings.

Thus, I paper-traded a Nov 85 Call on 8 Nov 2007 for $540.00 per contract when PCLN was trading around $85.00. I understand that it was a little risky to buy a call when the market was rather bearish. In fact, the Dow Jones Index lost more than 350 points on 8 Nov 2007!! But on the other hand, if PCLN could report another stunning earings quarter, the stock price would move up tremendously either by institutions shifting their money into the better performer or from covering by the short-sellers.

On 8 Nov 2007, (PCLN) reported Q3 (Sep) earnings of $1.58 per share, excluding non-recurring items, $0.29 better than the Reuters Estimates consensus of $1.29; revenues rose 33.7% year/year to $416.9 mln vs the $386.6 mln consensus. The company also provided upside guidance for Q4 EPS of $0.77-0.85 vs. $0.77 consensus; ad expect Q4 revenues up 22-26% (roughly $317-328 mln) vs. $323.53 mln consensus.

It was another knock-out earnings for (PCLN). I expected PCLN to do well for its European market but in this quarter there was also a significant increase in domestic booking rates. On 9 Nov 2007, PCLN promptly gapped up +$14.00 to $98.00 and moved up another +$4.00 to close at $103.00.

I sold the Nov 85 Call at $1,140.00 for a profit of $570.00 (including commissions).

With (PCLN) having gapped up more than $10.00 in this recent earnings quarter, the time value of the options would definitely price in this amount of gapping range (ie. $10.00) for the next earnings quarter. So, be aware that options would be expensive if you intend to trade PCLN for the next quarter's earnings announcement. Also, if you observe high expectations building towards PCLN next earnings announcement and the share price keeps going up in the few days leading to earnings announcement, be careful that the stock might not perform phenomenally if the share price has moved up too much before earnings or PCLN did not report spectacularly in the next earnings quarter.

Yours Truly,

Tony Chai
Options Trading Resources