$ORCL Fiscal Q1 Earnings Preview

by Enis September 13, 2013 11:21 am • Commentary

Event:  ORCL reports their fiscal Q1 earnings on September 19th after the close.  The options market is implying about a 4.5% one day move, which is below both the 4 qtr avg of about 6% and the 8 qtr avg of about 5.75%.

Sentiment:  Wall Street analysts are generally positive on the stock, with 32 Buys, 12 Holds and 2 Sells, with an average 12 month price target of around $36.  Short Interest is at 1.2%.

Options Open Interest:  Open interest is skewed 1.1 to 1 towards calls vs. puts.  The largest open interest is concentrated in Jan14, in the Jan 37 calls (45k) and the Jan14 30 puts (27k).  Interestingly, ORCL’s yearly range is 30 to 36.5.  Among near dated options, the Sept 34 calls have around 25k of open interest.  

Price Action / Technicals:  ORCL has been a serious market laggard since 2011.  The weekly chart shows how the stock was unable to get above its 2011 high around $36.50 earlier this year:

[caption id="attachment_30236" align="alignnone" width="600"]Weekly Chart of ORCL, Courtesy of Bloomberg Weekly Chart of ORCL, Courtesy of Bloomberg[/caption]

In the near-term, the stock continues to make lower highs since its high of the year in mid-March, so the short-term downtrend shown in red is important to watch.  Long-term support is around the $30 level, shown in green.  The two major blue candles this year are the last 2 earnings reports, so investors will likely lose patience with ORCL if it has another nasty miss.

Fundamentals:  ORCL management has done a very poor job in 2013 of guiding investor expectations.  After their March earnings miss, they blamed it on some of the expected sales being pushed into the next quarter.  But on the June earnings miss, it became clear that ORCL was getting hurt by the international slowdown as well as by emerging competition from emerging cloud companies.

This is ORCL’s seasonally slow quarter, so guidance going forward will be especially important.  The one positive for ORCL is that it is starting to look cheap vs. other large cap stocks in the market since it has been stagnant over the last 2 years.  Here is its trailing 12 month P/E over the last 10 years:

[caption id="attachment_30238" align="alignnone" width="600"]ORCL Trailing 12 month P/E, Courtesy of Bloomberg ORCL Trailing 12 month P/E, Courtesy of Bloomberg[/caption]

But if ORCL’s 8-10% expected earnings growth appears too optimistic, then a 14x multiple might start to look too rich as well.

Volatility:   ORCL realized volatility has been very subdued ever since the last earnings report.  While implied volatility has risen into earnings next week, the 30 day implied volatility is likely to fall back to the 20 area after the event:

30 day implied volatility (red) vs. 30 day realized volatility (blue) in ORCL, Courtesy of LiveVolPro

ORCL’s last 2 earnings moves were almost identical in scope (down 9-10%), so options traders are less willing to sell volatility ahead of earnings this time around.

Trades:  Stay tuned for our thoughts on potential trade structures that we’ll be posting ahead of next week’s event.