Event: ORCL reports their fiscal Q3 earnings Wednesday after the close. The options market is implying a 3.5% move vs the 4 qtr avg of about 2.5% and the 8 qtr avg of about 3.8% (includes a decline of 11.66% in Q2 2011, which with out it the avg was ~2.7% over the other 7 qtrs).
Sentiment: Wall Street analysts are fairly bullish on the stock with 34 Buys, 11 Holds and no Sells with an avg 12 month price target of $38.25. Short interests sits at just above 1% of the float.
Options Volume/Open Interest: Options volume is skewed towards calls with total open interest at 273k calls and 187 puts, with the single line of open interest in the Jun 35 calls, with 53,500. The next highest lines of open interest is the Jan14 35 calls with 18,700, the Jan14 30 puts with 18,600 and the Apr 37 calls with 17,400.
Vol Snapshot: 30 day at the money realized vol is trading near 2 year lows, as 30 day implied vol is trading below the previous 7 pre earnings readings. IV should come to high teens following the print.[caption id="attachment_23797" align="aligncenter" width="589"] ORCL 30 day realized (white) vs 30 day implied vol (blue) from Bloomberg[/caption]
Price Action / Technicals: After having a monster year in 2012 (up ~33%), ORCL is up nearly 9%, outperforming the Nasdaq by over 1%, and besting the performance of large cap software companies like MSFT up ~6% ytd and SAP up ~4% ytd.
From a technical standpoint, the 5 year chart is all you really have to look at, the stock spent the better part of the last 2 years of trading back and forth bwtn 25 and 35 since making new 10 year highs back in 2011. The stock now looks poised (on any good news) to break out of this fairly well defined long term base. The all time highs in the stock, a tad above 46, from late 2000, before the tech bubble burst, will not be recaptured anytime soon.[caption id="attachment_23798" align="aligncenter" width="589"] ORCL 5 yr chart from Bloomberg[/caption]
Valuation / Fundamentals: ORCL’s market cap nearing 13 year highs is likely to be at the leanest margin to that of MSFT ever (ORCL at $172B vs MSFT at $236B). This is not significant for any major reason to speak to the relative performance of the 2 of late, but MSFT’s balance sheet remains the monster in the space with almost 23% of the market cap in net cash (excluding debt) vs ORCL”S ~10%. Now this is important because ORCL has been a serial acquirer of large software and hardware companies to achieve their long standing earnings growth target of at least 10%. MSFT on the other hand is expected to grow much slower, but pays a dividend that yields 3.25% vs ORCL’s .06 quarterly dividend that yields less than 1% annually.
I make this comparison because u get what you pay for, MSFT trades at a near record low forward P/E of btwn 9-10, while ORCL trades at ~13.4x expected 2014 earnings.
Expectations: In a note to clients dated March 12, 2013, Goldman Sachs, who rates the stock a Buy with a 12 month price target of $39, had the following to say:
Oracle will report F3Q13 results on March 20 after market close. We are modeling reported revenue of $9.38bn (up 4% yoy) and EPS of $0.66, which is in line with consensus. Guidance for the quarter was for revenue to fall within a range of $9.15bn- $9.52bn (up 1% to up 5% yoy) while EPS was guided to be between $0.64-0.68. As is typical, license sales and hardware product revenue will be the focus for the quarter.
We are modeling total reported software license and cloud revenue of $2.58bn, representing 8% yoy growth, versus consensus of $2.54bn (up 7% yoy). This compares to management’s license revenue growth guidance of up 3% to 13% yoy on a reported basis. The company had expected FX to be a one percentage point headwind to revenue yoy, with constant currency license revenue growth to be between 4% and 14% in F3Q13. However, we believe currency was likely a worse headwind than initially expected (300bp versus 100bp) as average FX rates for the GBP and the JPY deteriorated versus when the company provided guidance on December 18, 2012 (down -5% and down -8%, respectively).
MY VIEW: Consensus estimates appear to be achievable as investors will obviously be focused on guidance and any signs of potential future benefit from their struggling hardware division acquired from SUNW a few years back and now run by former HPQ CEO Mark Hurd. While the stock is not exactly expensive relative to the market, it is vs. many of its peers. Any word on higher dividend or increased share buybacks will likely be met with enthusiasm, but for the stock to break out in a meaningful way above the 2008 high, I would suspect we will need to see a beat and raise and some further info on share-buybacks or increased dividends.
AS we get closer to Wednesday’s print, we will be sure to post on any trades that appear attractive, Stay Tuned.