This Could be a Very Profitable Trade that Won’t Last Long…

If Memorial Day holidays plans are on your mind, then this online travel and reservation company should be front-and-center. Not only can it help you save money on travel costs, but trading the stock could also boost your portfolio. However, the opportunity to substantially profit from the trade may be limited. That’s because the stock is quickly reversing out of a short-term pullback.

For bargain-hunting traders, the recent sell-off makes the triple-digit share price of online travel firm, Priceline.com (NYSE: PCLN) a little less, well, pricey.

#-ad_banner-#The pullback occurred after the stock touched a 10-year high in early May, following better-than-expected first-quarter results. Soon after, Goldman Sachs downgraded the stock and expressed uncertainty that the company could continue to sustain such rapid long-term growth.

The downgrade led to an explosive, reactionary selloff. But the share price is already picking back up. The technicals and fundamentals for this stock suggest plenty of near-term growth ahead.

Touted as the world’s leading online reservation company, Priceline aggregates flight, hotel and car rental rates from multiple sources. Potential customers are presented with a compilation of the lowest price booking options available, based on their travel criteria. Alternatively, customers can name-their-own-price on a reservation. If the bid is accepted, then savings can be had up to 50% off the going rate.

The idea of easy-to-book budget travel has rapidly caught on worldwide. This most recent quarter, more than 80% of the U.S.-based company’s sales were from international travelers from Asia, Latin America and Europe.

And because the company’s business model is online, Priceline is likely to be able to continue maintaining high profitability, with low expenses, as it further expands across the globe.

Technically, the stock appears strong. Traders could potentially benefit from getting in at current levels.


 
In the past two years, Priceline has surged nearly 485%, rocketing from a low of $96.05 to a recent high 10-year of $561.88.

Following recent the Goldman downgrade Priceline shed more than 7% of its share price. But the stock remains on a Major and accelerated uptrend line — and it is also well above support at $428.10.

Currently, Priceline appears to be climbing back toward resistance at $561.88. If the stock can break through resistance, it will bullishly complete an ascending triangle pattern. The price target for a completed triangle, calculated by adding the height of the triangle to the breakout level, suggests the stock could hit a high of $695.66 ($561.88 – $428.10 = $133.78; $133.78 + $561.88 = $695.66). This price is above the stock’s early-2000 high of $625.50 and represents a potential 33%-plus gain from current levels.

Fundamentally, Priceline appears to have strong growth potential, at least for the next two years. On May 5, the company released better-than-expected first-quarter results. Revenue for the period rose 38.5% to $809.3 million, from $584.4 million in the year-earlier quarter. Analysts’ projected sales were $779.3 million.

Strong international hotel and car rental bookings drove growth. International hotel bookings increased nearly 80% and car rental bookings rose nearly 65% in the quarter, compared to the year-ago period.

For the upcoming second-quarter, the company expects revenue to increase in the range of 36-41%, to $1.1 billion, from $767.4 million in the comparable quarter a year-ago. With strong international growth, analysts project full-year 2011 revenue will rise at least 35.5%, from $3.1 billion to $4.2 billion. By 2012, analysts project sales will increase a further 22.6% to $5.2 billion.

The earnings outlook is equally upbeat.
Due to increased hotel bookings, first-quarter 2011 earnings jumped 56.5% to $2.66 per share, from $1.70 in the year-ago period — marking the sixth straight quarter of 50%-plus earnings growth. Analysts projected earnings would only rise 43.5% to $2.44.

Priceline also gave upbeat guidance for the upcoming quarter. The company expects second-quarter earnings to be in the range of $4.70-$4.90, representing at least a 52% increase from the year-earlier quarter. For the full 2011 year, analysts’ project earnings will soar 50.7% to $20.33, from $13.49. With continued international growth, analysts expect earnings to increase a further 28.5% in 2012.

Although the company is richly valued, it has maintained a formidable 40%-plus return on equity (ROE) since 2008. Currently, ROE hovers just under 40%, at 37.3%.

Action to take –> Given that the share price has recently pulled back, yet the stock maintains a solid near-term technical and fundamental growth outlook, I think Priceline could be a profitable trade, easily yielding 33%-plus gains.