Oracle (ORCL) Report Fiscal Q1 Tomo: Short Term Bearish Play with 4 to 1 Potential Payout

by Dan September 19, 2011 10:16 am • Commentary

ORCL $28.35

EVENT: report fiscal Q1 and issue Q2 guidance tomo after the close.

IMPLIED MOVE vs HISTORICAL: Options market currently implying about a 5% move into earnings vs the 8 qtr average move post earnings of about 3.75%  

SENTIMENT: Wall Street very positive on the company with 35 Buys, 7 Holds and only 1 Sell.  Short interest is a paltry 1% of the float.  Of the top 15 largest  institutional  shareholders, 5 reduced their stake in their latest Q2 13f filings while the other 10 added.  Interesting to note though that Capital Research, the largest outside shareholder, reduced their position by 20% in the period.

Understandably, earnings estimates have been coming down into the print in light of the current macro issues as ORCL has considerable revenue exposure to some of the trouble spots: Europe~30% , government ~15% and financial services at ~15%.

Many analysts note the potential near term benefits of the strengthening US$, which could offset some near term rev weakness as ~50% of their sales come from overseas, but if the dollar were to maintain its strength this tailwind could quickly become a headwind in the coming quarters.

VALUATION:  Stock trades at ~12x this years expected earnings which is basically in line to the S&P but cheap to some of its faster growing peers.  Company only expected to grow eps and revs by about 8-9% over the next 2 years.

Which leads me to their acquisition strategy, they are serial acquirers of growth with 5 multi-billion $ deals in the prior 6 years; Jan 2010/SUNW-$7.4b,  Jan 2008: /BEAS-$8.5b,  Mar 2007:/HYSL- $3.3B, Jan 2006/SEBL-$5.85b and Jan 2005/PSFT -$10,3b.

With HPQ‘s intention to buy Autonomy for ~$10billion as they shed hardware and push deeper into enterprise software, what sort of pressure does this put on ORCL to buy growth?

PRICE ACTION: the stock is down ~9% under-performing the Nasdaq only down ~3% ytd….the stock is up about 14% from it’s 52 week low set on Aug 18th following HPQ’s deal announcement for Autonomy.  Stock is down about 22% from the 52 week highs made in April.

TECHNICALS: Since making the new multi-year highs in the spring the chart has made a series of lower highs and lower lows and could be vulnerable to re-test the near term recent low of about $25 which also happens to be a 2 yrs support resistance level.


MY VIEW: the stock while not expensive, and expectations not particularly high heading into tomorrow’s earnings announcement seems like a decent candidate to short regardless given their geographic and enterprise dependence as we headed into what I feel will an increasingly messy macro situation for the balance of the year.

When you consider that the stock traded as low as $22 prior to the announcement of Qe2 in Sept 2010, I think there are plenty of stocks that will see those lows again as the European debt crisis threatens our own economic growth.

I am hard-pressed to see how ORCL did not see push outs in orders from financial services and governments the world over given most countries’ need for austerity and as many tech companies have already expressed that activity in Europe ground to a halt in August.


TRADE: ORCL $28.35 BUY the Sept23rd weekly 27/26 Put Spread for .20

-Buy Sept 27 Put for .40 and

-Sell Sept 26 Put for .20

Break-Even on Sept23rd Expiration:

Profits: btwn 26.80 and 26 make up to .80, below 26 make full .80

Loses: btwn 26.80 and 27 lose up to .20 and above 27 lose full .20


TRADE RATIONALE: I want to make a very short term bearish bet with defined risk into the print that the stock will go back to near-term support to about $26 on weak guidance.  With an ~5% implied move it won’t take much on the downside to break-even on this trade and with a larger than expected move could realize multiples of the premium paid…..obviously getting the direction right is key…..

4 Month ORCL chart from Bloomberg LP