2nd Update Dec 21st, 2011 at 9:53am: When you back the chart out a little, back to about 2008, you see that $25 level is huge support. Frankly I am fairly surprised by the magnitude of the move and in some ways you could see some selling into year end as the stock approaches the down 20% mark on the year and this could further cause large institutions to sell.
Trade Update Dec 21st, 2011: ORCL is down 13% this morning after missing on their fiscal Q2 and guiding lower for Q3. AFter reading through the results I am not sure there is too much anywhere in the report to get excited about for the near future. The stock is trading with in a few % of the August lows and I would expect some value buyers to step in at these levels as names like this with wide geographic exposure and disproportionate enterprise exposure will clearly be used as a proxy for an early cycle technology play.
As for my Call Spread that I bought yesterday for .50 I will now cover the Jan 32 call that I am short at .02 and just stay long the Jan 30 calls that are now only worth .06 with the stock at 25.60. There is a very good chance that this sell off is over done, and I will look to buy call spreads out to Feb or March if the stock gets below 25.
This trade was a good example of a stock that was neither overbought or oversold heading into an event and without some data point that could be extrapolated from a competitors recent report or some other input it was really hard to get an edge in the options market. And when this is the case the best way to express a view though is by defining your risk, and always in an event situation risking what you are willing to lose.
This may sound like a bit of a copt out to some of you, but I have learned through my long career in this business, that there are no crystal balls, and the main goal, aside from preserving capital, is defined risk plays on situations that are not “investments”.
Original Post Dec 20th, 2011: ORCL Reports FQ2 Tonight, Preview and A Couple Ways To Play For a Bounce
ORCL report their fiscal Q2 earnings tonight after the close. The options market is currently implying about a 3.5% move vs the 4 qtr average move of about the same.
-The street is overwhelmingly positive on the name with 36 Buys, 7 Holds and only 1 Sells, with an avg 12 month price target of of about 36.40 or about 27% higher than current levels.
-Short interest is low at less than 1% of the float.
-ORCL is down 5.5% ytd which is inline with large cap software peer MSFT, also down about 7%, while both are underperforming the Nasdaq which is down a little less than 3%.
-With the stock at 28.60, technically it is in the midpoint of the range that it has been in since early August, up about 16% from its August lows and down about 14% from its November highs.
Below are some Excepts from some Analyst previews:
Goldman Sachs, in a note to clients Dec 16th, had the following to say about the upcoming report:
Oracle will report F2Q2012 results on December 20 after the close. We are modeling revenue of $9.28bn and EPS of $0.58, which compares to consensus of $9.23bn and $0.57, respectively. We are modeling license revenue of $2.25bn (+13% yoy), which compares to consensus of $2.21bn (+10% yoy) and guidance of +6% to +16%. On the hardware side, we are forecasting product sales of $1.06 bn (-5% yoy), which compares to consensus at $1.07 bn (-4% yoy) and guidance of down 5% to flat. While there is obviously concern that budget flushes could be weaker than normal, our checks support only relatively mild disruption to the quarter for the company.
Looking out to F3Q2012, we see EPS guidance of $0.57 – $0.59 and we see the most likely scenario for license growth guidance as +5% to -5% ($2.10bn to $2.33bn). Our best case scenario is +7% to -3% and our worst case calls for +3% to -7% yoy growth. Given the consensus license forecast currently sits at +7% yoy growth ($2.36bn), this implies that consensus license forecasts will likely move lower post results. We do NOT view this as an Oracle specific event, but rather a sign of a more challenging deal closing environment coupled with conservatism in forecasting.
Valuation: With macro concerns we believe many will shift to caring more about Oracle’s
ability to protect EPS vs its ability to post upside. In our view, this could lead to the broader software universe getting impacted more in the near-term than Oracle. As a result, we would be using weakness that may occur as a result ofthe upcoming EPS print to add to positions. At $29, Oracle trades at 11X our CY12 EPS forecast of $2.56. Our 12-m $39 PT is based on DCF, P/E, and EV/Sales.
Citigroup in a note to clients on Dec 15th had the following to say about tonights report:
Checks show few macro weak spots – Data points suggest that spending Europe remains spending environment remains OK through the end of Nov. We don’t expect ORCL can repeat license upside from Europe in Q2, but we don’t expect Europe to be singled out as a major issue. Based on our tracking, hiring at Oracle has tightened, thus OpEx looks controlled. This likely signals continued concern by management around macroeconomy. Relatively robust applications demand in general is a positive for Oracle. Server tracker data continues to suggest share losses for Solaris, although we believe the trend is not worsening.
Q2 seasonality suggests some upside, Q3 looks inline – We estimate F/X has moved 120bps against ORCL in the months since ORCL gave guidance, however Citi and consensus estimates embed about 10% sequential revenue growth, lower than the 13-14% range suggested by historical performance in Q2s. If license is 1pp better, we a positive ¼ cent impact on EPS . Q3 seasonality suggests consensus is in the middle of normal seasonality thus we aren’t expecting a “raise” of guidance. Hardware GMs likely have some upside and we expect OpEx will remain controlled, leaving an upward bias to EPS.
Morgan Stanley in a note to clients Dec 15th had the following to say about tonight’s report:
Conclusion: While we expect Q2 to be solid, our positive thesis on ORCL is about several CY12 drivers including a) a firm apps cycle converging with the Fusion Apps catalyst, b) an improving middleware & analytics story, c) hardware accelerating to 10%+ growth on Exa-family strength and d) margins expanding faster than people expect. Beyond Q2, we expect these catalysts to unfold over the next 6-12 months, in turn driving the stock to our $36 PT, while ORCL remains one of our best defensive growth names.
Checks? We have said for years that checks on ORCL are futile given its size. Ours, while not conclusive, pointed to solid performances in middleware, analytics, and Edge apps with steady activity in ERP upgrades.
The Mechanics Help: Guidance is 4% pts. below historical seasonality for lic. and rev. for Q2, and ORCL has about 12% of license rev. in deferred. ORCL saw deals over $3M increase by 45% YoY in Q1, and we sense that large deal momentum continued into Q2. Currency remained a 100 bps tailwind in Q2 by our est., inline with mgmt’s guidance, while the +90 bps YoY op. margin increase we model for 2Q is well below the 370 bps seen in Q1, and likely low. Net, we believe ORCL should be able to meet cons. rev./lic. of $9,232/$2,205M with a higher likelihood of upside to cons. EPS at $0.57. Currency Will Weigh on Q3: We estimate currency moves to a 200 bps headwind for Q3 at current levels, although ORCL has easier comps on total rev., and recent acquisitions should help offset some pressure. While we are optimistic about CY12 despite the macro, we expect ORCL to be conservative with Q3 guidance and do not see much upside to cons. rev./lic/EPS of $9,455/$2,370/$0.59 for Q3.
MY TAKE: ORCL is a fine company that has deservedly earned its reputation in the investment community as a relatively consistent deliverer on stated goals, but also, a serial acquirer of competition in areas that they want to enter. When you look at their acquisitive history and you consider SAP’s recent stated $3.4billion acquisition offer for SFSF, it is easy to speculate that ORCL is easily preparing to make another.
ORCL has had 1 large cap acquisition in 5 of the last 7 Q1s dating back to Jan 2005…….They have made 3 $1billion acquisitions since Nov 2010, but are they preparing for a big one in the coming months??
SUNW-$7.4b Jan 2010,
BEAS-$8.5b Jan 2008,
HYSL- $3.3B Mar 2007,
SEBL-$5.85b Jan 2006,
PSFT -$10.3b- Jan 2005.
With EPS and Revenue expectations to only grow at about 8-10% for the balance of fiscal 2012 and 2013, a deal to accelerate growth to their previously desired 20% range. While this is obviously not a reason to avoid owning a company like ORCL, the “cheap” deals are getting a little picked through as m&a in the software space has been a bit active of late over the last few years.
As far as expectations go I think it is fairly clear to read from the above is that the street is already in defense mode even though they are overwhelmingly positive on the name……the previews are explaining away the potential areas of weakness like currency, while also noting that comparisons in some areas are not as daunting as usual.
If the stock wasn’t down about 9% since the beginning of the month I would be definitely inclined to lean short the stock into tonight’s print, but with expectations not exactly running high, it will take a big disappointment on Q3 guidance to take the stock much lower. I think it is safe to assume that most earnings disappointments encompassing the period since early October can be easily explained away, but when the first large multi-national seriously lowers the bar for the 2012 Q1 period then we may be in for a new reality for the coming earning season in January.
Don’t forget that large swath of semiconductor companies pre-announced Q4 results (INTC, TXN and ALTR) and all had different reasons but ultimately they may all converge on the thesis of “global slowdown”.
SO WHAT TO DO WITH ORCL? If I were long I would consider stock replacement as if we got the double whammy of a miss and then a guide down ORCL could see the lows from Aug of about $25. I place a low probability of this happening, but in an effort to avoid “disasters” as we head into year end this could be a prudent alternative, especially with the existence of weekly options and the fact that the earnings move appears to be priced cheaply. I also feel that if you want to make a bullish bet for the chance that the company does not guide below current muted expectations you could look to Jan expiration to make bullish bet back to the November highs.
1st Trade For Longs: Stock Replacement, Sell Existing Long and Replace with straight Call Purchase. You Would only do this if you were long and didn’t want to risk a miss and a guide down and have the stock realize an outsized move to the downside…..while you give away about 4% (the implied move to the upside, you would participate in anything above that with defined risk.
1stTRADE: ORCL ($29.10) Buy Dec23rd 30 call for .35
-Buy 1 Dec23rd 30 Call for .35
Break-Even on Dec23rd expiration (Friday):
Profits above 30.38 up ~4%
OR The Trade That I am likely to do before tonight’s print:
2nd TRADE: ORCL ($29.10) Buy Jan 30/32 Call Spread for .50
-Buy 1 Jan 30 Call for .75
-Sell 1 Jan 32 Call at .25
Break-Even on Jan Expiration:
Profits btwn 30.50 and 32, make up to 1.50 or 3x your money. above 32 make full 1.50
Loses btwn 30.50 and 30, lose up to .50, with max loss of .50, 30 or below.
TRADE RATIONALE: As stated above, ORCL does not set up as a high flier which is overextended into an event, so doesn’t exactly fit my criteria to short. The risk of a miss and downbeat guidance while still clearly there, are not as likely in a name like ORCL which tends to have some flexibility to manage earnings and with a hoard of deferred and steady licensing revenues. I like the payout of this spread and if they company meets current qtr with generally positive commentary I think a good chance into year end that this stock moves back towards the NOV highs and unchanged on the year.