$ORCL Fiscal Q4 Earnings Preview

by Enis June 18, 2014 11:31 am • Commentary

Event: ORCL reports its fiscal Q4 earnings on tomorrow after the close. The options market is implying about a 3.75% one day move, which is in line with the four-quarter average of about 3.8% and the eight-quarter average of about 4%.

Sentiment: Wall Street analysts are somewhat positive on the stock, with 29 Buys, 14 Holds and only three Sells, though the average 12-month price target is only around $43.  ORCL is already up 10.5% year-to-date, and less than 10% away from its all-time high of $46.47 set in September 2000. Short interest is negligible at 1% of the float.

Options Open Interest: Open interest is skewed towards puts vs. calls by a ratio of 1.025 to 1. Call have been more active over the past month as ORCL has maintained its uptrend, and the one-month average call to put ratio is around 1.1 to 1. There are many strikes with over 10k of open interest, including the June 21 $40, $42, and $45 calls, the July 19th $41 puts, the September $40 calls, and the January 15 $42 calls.

Price Action/Technicals: ORCL has been in a very steady uptrend since last June’s earnings gap lower, with a clean series of higher highs and higher lows:

ORCL daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg
ORCL daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg

The stock has closely tracked its rising 50-day moving average since last fall, and the 50-day ma is now around $41.20.  That is the first main support on the downside, with the rising 200 day ma still more than 10$ away, now around $37.20.   On the upside, the stock is at its highest level since 2000, with $46.47 the all-time high.

Fundamentals:  ORCL has had a mixed record on earnings over the last couple years.     The stock has generally been pulled higher by the broader market, since its own competitive landscape in enterprise software has generally resulted in ORCL losing share and profits to the cloud-based rivals.

The stock’s P/E vs. earnings growth ratio is near a 10 year high, an indication of the stock’s precarious valuation situation if ORCL does not deliver on expectations over the next few quarters:

P/E vs. 12 month earnings growth ratio, Courtesy of Bloomberg
P/E vs. 12 month earnings growth ratio, Courtesy of Bloomberg

Of course, ORCL’s perceived stability is its main draw for investors.  Nonetheless, the risk in ORCL shares is likely higher now than it has been for most of the past decade.

Volatility:  Considering that the fiscal Q4 earnings report tomorrow is the most important of the year for ORCL from a seasonal perspective, implied volatility is unusually low as options traders don’t expect a larger-than- normal move on earnings:

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

That’s in large part due to low implied volatility throughout the market. As a result, we wouldn’t be surprised to see 30-day implied volatility drop to a new two-year low after the earnings event.

Our View:  We currently have the June 40/37 put spread on in ORCL, which has lost most of its value since our early April initiation.  These were our thoughts back then:

When ORCL reported last month, the stock originally sold off, but after the company made  it clear that their revenue and earnings miss was the result of their transition to….wait for it….the CLOUD.   Well the cloud is a bit cloudier this week, and I suspect some of the excitement coming out of the higher valuation names may cause those who just rushed into the likes of ORCL and MSFT to rethink their bullish thesis with the stocks at 13 year highs. I want to make a near term bearish bet that ORCL’s breakout fails and that the stock settles back in the range for most of 2014, below $40.

ORCL has rallied along with large cap tech since then, though the $40 level is still a slight possibility on a weak number this quarter.  At this point, given the low overall premium left in this put spread (worth about 0.13 here), we’re going to leave the position on into the event just in case as it’s not worth the commissions to close for a loss here.