Wednesday, September 19, 2012

5 Covered Writes: Priceline Our Top Choice

"If you want to study the social and political history of modern nations, study hell."

Thomas Merton

We selected five candidates and from this group, we have selected one as our top pick. A covered write strategy is suggested for our top pick. One can use a similar strategy on any of the other candidates if one finds them to be of interest. If you are unfamiliar with a "covered writes" strategy, see our piece "Benefits of a Covered Writes Strategy."

We like Priceline.com, Inc. (PCLN) for the following reasons:

  • It has a five-year return on Investment average of 32%.
  • Net income exploded from $489 million in 2009 to 1.47 billion in 2011.
  • Cash flow per share is up almost 150% from $10.23 per share in 2009 to $24.52 a share in 2011.
  • It sports a great 5 year sales growth rate of 30%.
  • A good levered free cash flow of 974 million.
  • EBITDA has increased from $526 million in 2009 to $1.47 billion in 2011.
  • A great ROE of 52.69%.
  • A beta of 1.89.
  • A strong quarterly earnings growth rate of 66.35%.
  • A good quarterly revenue growth rate of 35.5%.
  • It has a decent quick and current ratio of 2.77 and 2.77 respectively.
  • A very good interest coverage ratio of 36.
  • An excellent long-term debt to equity ratio of 0.03.
  • $100K invested for 10 years would have grown to $1.33 million for an annualized ROR of 29.6%.

Covered call strategy for Priceline.com

Priceline.com is extremely overbought at present so traders could put the following strategy into play. Sell the Oct 760 calls. They are currently trading in the $71.30-7$72.30 ranges. Let's assume we are able to sell them for $71.80.

Once you sell the calls $71.80 per share is deposited in your account for a total of $7,180. If the stock trades past $760, then your shares will be called, and you will be paid $760 per share. Your total gain will be roughly $18.00 plus the $71.80 premium you were paid per call for a gain of 12.1% based on today's price of $742. This is roughly 600% or so above the official inflation rate. If the stock does not trade above 760, then you get to keep the premium of $71.80. If your shares are called you still walk away with a nice gain and there is nothing to stop you from repeating the whole process again.

Many key ratios will be covered in this article and investors would do well to get a handle on some of the more important ones which are dealt with below.

Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long-term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making. This situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest - 5 Appealing Companies: Baidu Our Top Choice.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditures, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share are $5, then the company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. his gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article - 5 Interesting Communications Plays: China Mobile Our top pick.

Priceline.com, Inc.

Levered Free Cash Flow: 974.69M

Growth

  • Net income for the past three years
  • Net Income 2009 = $489 million
  • Net Income 2010 = $528 million
  • Net Income 2011 = $1056 million
  • EBITDA 12/2011 = $1477 million
  • EBITDA 12/2010 = $850 million
  • EBITDA 12/2009 = $526 million
  • Net income Reported Quarterly = $226 million
  • Total cash flow from operating activities
  • 2009 = $509.67 million
  • 2010 = $777.3 million
  • 2011 = $1.35 billion
  • Cash Flow 12/2011 = 24.52 $/share
  • Cash Flow 12/2010 = 14.23 $/share
  • Cash Flow 12/2009 = 10.23 $/share
  • Annual EPS before NRI 12/2011 = 22.32
  • Annual EPS before NRI 12/2010 = 12.25
  • Annual EPS before NRI 12/2009 = 7.87
  • Annual EPS before NRI 12/2008 = 5.09
  • Annual EPS before NRI 12/2007 = 3.53
  • Performance

  • ROE = 52.69%
  • Return on Assets = 42.14%
  • Quarterly Earnings Growth = 66.3%
  • Quarterly Revenue Growth = 35.5%
  • Price to Sales = 8.34
  • Price to Book = 14.11
  • Price to Tangible Book = 19.44
  • Price to Cash Flow = 32.00
  • Price to Free Cash Flow = 29.60
  • Current Ratio 09/2011 = 2.77
  • Current Ratio 5 Year Average = 1.87
  • Quick Ratio = 2.77
  • Cash Ratio = 2.53
  • Interest Coverage 09/2011 = 36.77
  • Total return last 3 years = 740.7%
  • Total return last 5 years = 1206.32%
  • Company: Akamai Technology (AKAM)

    Levered Free Cash Flow = 259.33M

    Basic Key ratios

  • Percentage Held by Insiders = 3.8
  • Number of Institutional Sellers 12 Weeks = 1
  • Growth

  • Net Income ($mil) 12/2011 = 201
  • Net Income ($mil) 12/2010 = 171
  • Net Income ($mil) 12/2009 = 146
  • 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 17.34
  • Quarterly Net Income this Quarterly/same Quarter year ago = 14.42
  • EBITDA ($mil) 12/2011 = 475
  • EBITDA ($mil) 12/2010 = 408
  • EBITDA ($mil) 12/2009 = 363
  • Net Income Reported Quarterlytr ($mil) = 60
  • Annual Net Income this Yr/ Net Income last Yr = 17.33
  • Cash Flow ($/share) 12/2011 = 2.16
  • Cash Flow ($/share) 12/2010 = 1.85
  • Cash Flow ($/share) 12/2009 = 2.2
  • Sales ($mil) 12/2011 = 1159
  • Sales ($mil) 12/2010 = 1024
  • Sales ($mil) 12/2009 = 860
  • Annual EPS before NRI 12/2007 = 1.07
  • Annual EPS before NRI 12/2008 = 1.34
  • Annual EPS before NRI 12/2009 = 1.35
  • Annual EPS before NRI 12/2010 = 1.01
  • Annual EPS before NRI 12/2011 = 1.17
  • Performance

  • Percentage Change Price 52 Weeks Relative to S&P 500 = -5.96
  • Next 3-5 Year Estimate EPS Growth rate = 13.58
  • EPS Growth Quarterly(1)/Q(-3) = -116.67
  • ROE 5 Year Average 06/2011 = 13.58
  • Return on Investment 06/2011 = 10.05
  • Debt/Total Cap 5 Year Average 06/2011 = 6.73
  • Current Ratio 06/2011 = 7.56
  • Current Ratio 5 Year Average = 5.68
  • Quick Ratio = 7.56
  • Cash Ratio = 6.14
  • Valuation

  • Book Value = 12.02
  • Price/ Book = 2.97
  • Price/ Cash Flow = 17.30
  • Price/ Sales = 5.52
  • EV/EBITDA 12 Mo = 12.2
  • Company: W.W. Grainger Inc (GWW)

    Levered Free Cash Flow = 479.64M

    Basic Key ratios

  • Percentage Held by Insiders = 8.05
  • Number of Institutional Sellers 12 Weeks = 2
  • Growth

  • Net Income ($mil) 12/2011 = 658
  • Net Income ($mil) 12/2010 = 511
  • Net Income ($mil) 12/2009 = 430
  • 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 30.13
  • Quarterly Net Income this Quarterly/same Quarter year ago = 12.31
  • EBITDA ($mil) 12/2011 = 1210
  • EBITDA ($mil) 12/2010 = 1012
  • EBITDA ($mil) 12/2009 = 864
  • Net Income Reported Quarterlytr ($mil) = 148
  • Annual Net Income this Yr/ Net Income last Yr = 28.89
  • Cash Flow ($/share) 12/2011 = 11.55
  • Cash Flow ($/share) 12/2010 = 9.44
  • Cash Flow ($/share) 12/2009 = 7.4
  • Sales ($mil) 12/2011 = 8078
  • Sales ($mil) 12/2010 = 7182
  • Sales ($mil) 12/2009 = 6222
  • Annual EPS before NRI 12/2007 = 4.94
  • Annual EPS before NRI 12/2008 = 6.16
  • Annual EPS before NRI 12/2009 = 5.38
  • Annual EPS before NRI 12/2010 = 6.81
  • Annual EPS before NRI 12/2011 = 9.04
  • Dividend history

  • Dividend Yield = 1.3
  • Dividend Yield 5 Year Average = 1.7%
  • Annual Dividend 12/2011 = 2.52
  • Annual Dividend 12/2010 = 2.08
  • Forward Yield = 1.22
  • Dividend 5 year Growth = 17%
  • Dividend sustainability

  • Payout Ratio 06/2011 = 0.29
  • Payout Ratio 5 Year Average 06/2011 = 0.3
  • Change in Payout Ratio = -0.01
  • Performance

  • Percentage Change Price 52 Weeks Relative to S&P 500 = 46.11
  • Next 3-5 Year Estimate EPS Growth rate = 13.4
  • EPS Growth Quarterly(1)/Q(-3) = -118.99
  • ROE 5 Year Average 06/2011 = 21.34
  • Return on Investment 06/2011 = 23.27
  • Debt/Total Cap 5 Year Average 06/2011 = 11.31
  • Current Ratio 06/2011 = 1.94
  • Current Ratio 5 Year Average = 2.66
  • Quick Ratio = 1.03
  • Cash Ratio = 0.39
  • Interest Coverage Quarterly = 85.68
  • Valuation

  • Book Value Quarterly = 39.06
  • Price/ Book = 5.66
  • Price/ Cash Flow = 18.40
  • Price/ Sales = 1.84
  • Company: Mobile Telesystems (MBT)

    Levered Free Cash Flow = 1.11B

    Growth

  • Net Income ($mil) 12/2011 = 1568
  • Net Income ($mil) 12/2010 = 1381
  • Net Income ($mil) 12/2009 = 1014
  • 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 5.63
  • Quarterly Net Income this Quarterly/same Quarter year ago = 151.8
  • EBITDA ($mil) 12/2010 = 4837
  • EBITDA ($mil) 12/2009 = 3885
  • Net Income Reported Quarterlytr ($mil) = 393
  • Annual Net Income this Yr/ Net Income last Yr = 4.59
  • Cash Flow ($/share) 12/2011 = 3.80
  • Cash Flow ($/share) 12/2010 = 3.61
  • Cash Flow ($/share) 12/2009 = 3
  • Sales ($mil) 12/2011 = 12319
  • Sales ($mil) 12/2010 = 11293
  • Sales ($mil) 12/2009 = 9867
  • Annual EPS before NRI 12/2007 = 2.1
  • Annual EPS before NRI 12/2008 = 2.01
  • Annual EPS before NRI 12/2009 = 2.7
  • Annual EPS before NRI 12/2010 = 3.82
  • Annual EPS before NRI 12/2011 = 1.47
  • Dividend history

  • Dividend Yield = 5.9
  • Dividend Yield 5 Year Average =2.93
  • Annual Dividend 12/2011 = 0.86
  • Annual Dividend 12/2010 = 0.82
  • Forward Yield = 4.73
  • Dividend 3 year Growth = 40%
  • Dividend sustainability

  • Payout Ratio 06/2011 = 0.59
  • Payout Ratio 5 Year Average 06/2011 = 0.37
  • Change in Payout Ratio = 0.22
  • Performance

  • Percentage Change Price 52 Weeks Relative to S&P 500 = -20.15
  • Next 3-5 Year Estimate EPS Growth rate = 13.4
  • EPS Growth Quarterly(1)/Q(-3) = 135.48
  • ROE 5 Year Average 06/2011 = 34.78
  • Return on Investment 06/2011 = 13.78
  • Debt/Total Cap 5 Year Average 06/2011 = 47.24
  • Current Ratio 12/2011 = 1.08
  • Current Ratio 5 Year Average = 0.86
  • Quick Ratio = 0.89
  • Cash Ratio = 0.58
  • Interest Coverage Quarterly = 4.35
  • Valuation

  • Book Value Quarterly = 3.86
  • Price/ Book = 4.96
  • Price/ Cash Flow = 4.79
  • Price/ Sales = 1.47
  • Company: Wells Fargo (WFC)

    Free Cash Flow = $10.2 billion

    Basic Key ratios

  • Percentage Held by Insiders = 0.02
  • Number of Institutional Sellers 12 Weeks = 4
  • Growth

  • Net Income ($mil) 12/2011 = 16211
  • Net Income ($mil) 12/2010 = 12663
  • Net Income ($mil) 12/2009 = 12667
  • 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 28.37
  • Quarterly Net Income this Quarterly/same Quarter year ago = 20.3
  • EBITDA ($mil) 12/2011 = 30238
  • EBITDA ($mil) 12/2010 = 26132
  • EBITDA ($mil) 12/2009 = 27015
  • Net Income Reported Quarterlytr ($mil) = 4107
  • Annual Net Income this Yr/ Net Income last Yr = 28.02
  • Cash Flow ($/share) 12/2011 = 3.43
  • Cash Flow ($/share) 12/2010 = 2.77
  • Cash Flow ($/share) 12/2009 = 3.01
  • Sales ($mil) 12/2011 = 87597
  • Sales ($mil) 12/2010 = 93249
  • Sales ($mil) 12/2009 = 98636
  • Annual EPS before NRI 12/2007 = 2.38
  • Annual EPS before NRI 12/2008 = 0.75
  • Annual EPS before NRI 12/2009 = 1.81
  • Annual EPS before NRI 12/2010 = 2.26
  • Annual EPS before NRI 12/2011 = 2.82
  • Dividend history

  • Dividend Yield = 2.7%
  • Dividend Yield 5 Year Average = 2.4%
  • Annual Dividend 12/2011 = 0.41
  • Annual Dividend 12/2010 = 0.2
  • Forward Yield = 1.39
  • Dividend 5 year Growth = -21%
  • Dividend sustainability

  • Payout Ratio 06/2011 = 0.17
  • Payout Ratio 5 Year Average 06/2011 = 0.43
  • Change in Payout Ratio = -0.26
  • Performance

  • Percentage Change Price 52 Weeks Relative to S&P 500 = 2.08
  • Next 3-5 Year Estimate EPS Growth rate = 10.14
  • EPS Growth Quarterly(1)/Q(-3) = -119.67
  • ROE 5 Year Average 06/2011 = 12.93
  • Return on Investment 06/2011 = 5.75
  • Debt/Total Cap 5 Year Average 06/2011 = 62.07
  • Current Ratio 06/2011 = 0.9
  • Current Ratio 5 Year Average = 0.97
  • Quick Ratio = 0.85
  • Cash Ratio = 0.14
  • Interest Coverage Quarterly = 7.19
  • Valuation

  • Book Value Quarterly = 24.7
  • Price/ Book = 1.4
  • Price/ Cash Flow = 10.06
  • Price/ Sales = 2.08
  • Conclusion

    The markets are still extremely overbought despite the recent pullback. For long term players who want to hold onto their positions this is the ideal time to sell covered calls as the odds favor a strong pull back. Selling covered calls opens up a second stream of income and provides a bit of hedge for your portfolio. Prudent investors would do well to wait for a strong pullback before committing funds to this market. A pullback in the 7-12% ranges would qualify as a strong pullback.

    Disclaimer

    This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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