$ORCL Fiscal Q3 Earnings Preview

by Enis March 18, 2014 9:21 am • Commentary

Event:  ORCL reports its fiscal Q3 earnings today after the close.  The options market is implying about a 4.5% one day move, which is below the 4 qtr avg of about 6.25%, but in line with the 8 qtr avg of about 4.25%.

Sentiment:  Wall Street analysts are somewhat positive on the stock, with 28 Buys, 15 Holds and only 3 Sells, though the average 12 month price target is only around $39.40.  ORCL is flat year-to-date, though the stock hit its highest level since the year 2000 when it reached $39.85 earlier this month.  Short interest is negligible at 1.15% of the float.

Options Open Interest:  Open interest is skewed towards calls versus puts by a ratio of 1.2 to 1. Calls have been more active ever since the stocks’ better than expected report in December, when ORCL moved up 6%.  The 1 month average call to put ratio is around 1.5 to 1, and yesterday’s volume was heavily skewed to calls, with the weekly Mar22nd 39 and Mar22nd 42 calls the most active lines.  The Mar22nd 40 calls have the most open interest, at around 25k.

Price Action / Technicals:  ORCL broke out to a new high in December, in the week after its strong earnings report.  After struggling to break through the $36.50 resistance level since mid-2011, ORCL finally pushed through there at the end of 2013:

ORCL 5 year weekly chart, Courtesy of Bloomberg
ORCL 5 year weekly chart, Courtesy of Bloomberg

Since that breakout, the stock briefly broke the $36.50 support in early February, but quickly bounced back.  That is the crucial support level to watch going forward.  On the upside, the $40 level is psychologically important, and is near the stock’s high from early March.  Above that, the stock’s all-time high from September 2000 is around $46.50.

Fundamentals:  ORCL had not had a strong earnings report in 2013 until its December report, which beat on both sales and earnings.  Market participants were particularly pleased by ORCL’s numbers since the macro environment for enterprise tech spending remained weak overall, as evidenced by the results at IBM and CSCO.

However, analysts cite ORCL’s continued investment in its cloud applications and software, as well as increased expenditure on its sales force, as finally bearing fruit by the end of 2014.

After two straight years of 1% sales growth, analysts are more optimistic that ORCL can deliver sales growth in 2014 and 2015.  The consensus analyst estimate is for 5% sales growth in both years, and 9% earnings growth on that top line number.  ORCL has grown earnings for 10 straight years, though like many tech behemoths, sales growth has been much more anemic since 2008.  Buybacks, lower tax rates, and acquisitions to build the business rather than incur operating expenses have served to elevate earnings growth despite stagnating sales.

At a 15x trailing 12 month P/E, ORCL is relatively cheap compared to the broader market. Investors are still skeptical about the prospects for sales growth considering the increased competition in the enterprise software arena from many cloud-based upstarts.  Another strong quarter from ORCL would go a long way towards removing that overhang.  Hence, the top line sales number and sales guidance might be as important as the bottom line earnings number.

Volatility:   ORCL’s 30 day implied volatility is in the high 20’s ahead of the earnings event, slightly lower than where it has been over the past 3 earnings releases:

ORCL 30 day implied volatility, Courtesy of LiveVolPro
ORCL 30 day implied volatility, Courtesy of LiveVolPro

The implied move for ORCL is also a bit lower than the 4 quarter average (4.5% vs. 6.25% 4 quarter average), as traders expect that last quarter’s report has removed some of the uncertainty around ORCL’s business prospects.  Implied volatility is likely to fall back into the high teens after the report.

Our View:  ORCL’s strong December report was pivotal from both a fundamental and technical standpoint.  The report led to a technical breakout for the stock, which has dramatically improved the technical picture, with former resistance at $36.50 now important support.  At the same time, ORCL expressed optimistic guidance for the first time in a while, even as the macro backdrop, particularly internationally, remains strained.  Given the reasonable valuation, bulls are optimistic about further upside if ORCL can deliver another solid report.  Meanwhile, bears are concerned about continued lackluster sales growth, which could portend larger long-term business issues.  As a result, without a major surprise, the $36.50-$40 range is likely to hold.  We might look at range trades later today.