Name That Trade – $ORCL: Like Ellison Trying to Hurd Catz

by Dan September 15, 2015 2:29 pm • Commentary

Event: Oracle (ORCL) is set to report fiscal Q1 results tomorrow after the close. The options market is implying about a 5% move between now and the end of the week, which is actually shy of the average one day move of 5.5% over the last 4 quarters.

Recent Price Action / Technicals: Prior to the stock market’s August swoon, ORCL shares had already been in decline following the company’s disappointing Q4 report given in late June, after a nearly 6 month consolidation in the low $40s:

ORCL 1yr chart from Bloomberg
ORCL 1yr chart from Bloomberg

At the stock’s lows on Aug 24th, it had made a new 52 week low, down a little more than 20% from its 2015 high made in June and down 25% from its 52 week and 15 year high made in December.

On a ten year basis, the stock is now approaching the lower band of the uptrend that has been in place since its 2009 lows, I think it is safe to say that the recent low near $35 is a crucial long term support level:

[caption id="attachment_56881" align="aligncenter" width="600"]ORCL 10 year chart from Bloomberg ORCL 10 year chart from Bloomberg[/caption]

Volatility Snapshot: As is the case with most large cap stocks in the U.S. market, implied volatility in ORCL has gone from near multi-year lows earlier in the Summer to making new multi-year highs:

[caption id="attachment_56883" align="aligncenter" width="600"]ORCL 3 year chart of 30 day at the money IV from Bloomberg ORCL 3 year chart of 30 day at the money IV from Bloomberg[/caption]

Short dated options prices in ORCL have come in about 20% from the recent highs, while VIX has been halved and many other large cap tech stocks have seen iv come in at least 30%.  ORCL’s has remained elevated as a result of the impending earnings event, but will be sure to come in hard after earnings, likely to the mid 20s.

Fundamentals / Valuation: ORCL is locked in a battle with Salesforce (CRM) to be the largest provider of cloud based software.  ORCL’s Q4 highlighted the many headwinds the company is dealing with at the moment, transitioning and reporting of Cloud/SaaS software, slowing sales of legacy business, exposure to enterprise and emerging markets, and of course the strength of the dollar.  Back in late June investors shot first and haven’t asked too many questions since.  After two consecutive fiscal Q4 prints of 80 cents, and about $11.1 billion in sales, ORCL reported 62 cents a share profit and $10.7 billion in sales. Q1 is a put up or shut up for the company.

ORCL trades at about 14x expected fiscal 2016 earnings, which are expected to decline 1 to 2% on 1% sales growth.

Acquisitions?: I suspect ORCL is going to be forced to make a large acquisition and soon to help stimulate growth. Which is has long been their plan.  Dating back to their $10 billion purchase of PeopleSoft in 2005, the company has made a bunch of smaller, but still very large purchases (Siebel for $6 billion in 2006,  Hyperion for $3.3 billion in 2007, BEA Systems for $8.5 billion in 2008, Sun Micro for $7.4 billion in 2010, RightNow for $1.5 billion in 2011, Taleo for $1.9 billion in 2012, Acme Packet for $2.1 billion in 2013, and Micros for $5.3 billion in 2014).  You get the point, any and all sales growth in the last decade has come from acquisitions.  So who’s next? With nearly a third of their $165 billion market cap in cash the company could make a large transformative deal, but their debt load has more than doubled since 2013 and investors could soon become worried about leverage ratios if future deals are expensive and don’t deliver.

Our View: while option prices appear expensive in vol terms, out of the money options look dollar cheap a month or two out if the stock makes a steady move after earnings. But we are not fans of long premium directional trades into events, especially in this environment, so we will highlight trades closer to tomorrow night’s results both for those who are considering leveraging existing holdings or those with a directional inclination but worried about high implied volatility.