Oracle Shares Flatten Out Ahead Of 3Q 2012 Earnings Release

By Brendan Gilmartin, VP, Research

Overview

Oracle (ORCL) is scheduled to report 3Q 2012 earnings after the close of trading on Tuesday, March 20. The results are typically available within the first minute after the bell and will be followed with a conference call at 5:00 p.m. EST. The results tend to have a broad impact across the technology sector and key market gauges, including the CME Index Futures.

Outliers and Strategy

Back in December, Oracle provided the following guidance for the 3Q 2012 period:

• Non-GAAP Earnings Per Share: $0.55 to $0.58.
• Revenues: Total revenue growth on a non-GAAP basis is expected to range from 3% to 7% in constant currency and 1% to 5% in U.S. dollars. Based on 3Q 2011 revenue of $8.807 billion, the projected range equates to: $9.071 billion to $9.423 billion in constant currency and $8.896 billion to $9.247 billion in U.S. dollars.
• The current Street estimates are for Non-GAAP EPS of $0.56 on revenues of $9.02 billion (Source: Yahoo Finance).

The reaction to Oracle's earnings can have a meaningful impact on other markets, including the S&P E-Mini Index Futures and NASDAQ E-Minis. Large-cap tech names such as Microsoft (MSFT) and IBM (IBM) could also be affected, along with the PowerShares QQQ (mirrors the Nasdaq 100) and Technology Select Sector SPDR (XLK).

Oracle shares are now trading at just 11.6x earnings, resulting in a FWD PEG ratio of just 1.05, implying the shares are trading in-line with the five-year growth rate. The shares are also at a mere 4.1x sales, below the five-year average of 5.2x.

Last quarter, Oracle surprised the Street with weaker than expected Non-GAAP EPS $0.54, below the Street estimate at the time of $0.57, sending the shares sharply lower after-hours, along with the major index futures and broad market ETFs. That report marked the first "miss" in the previous none quarters for Non-GAAP EPS.

Historically, Non-GAAP EPS >$0.04 above consensus and Revenues >$200 million above estimates have resulted in an upward move.

Based on the April 30 strikes, the options market is pricing in a roughly 7.6% move in Oracle's share price in response to earnings.

Recent News

03/12: Jefferies downgraded Oracle from Buy to Hold and cut the price target from $35 to $32, based in part on weaker than expected channel checks. The firm also cut earnings estimates, according to a post on StreetInsider.com.

02/21: JMP Securities downgraded Oracle to a Market Perform rating, due to questions surrounding its cloud-computing strategy, according to a post on Barron's.

02/15: Caris & Co. downgraded Oracle to an Average rating, due in large part to stiffer competition, according to Barron's.

02/14: Hedge Fund Manager David Tepper purchased 1.2 million Oracle shares during the 4Q, according to a 13-F filing.

Technical Review

Oracle shares are up around 20% since the sharp slide following the prior 2Q 2012 earnings release (Dec), recently retaking the 200-Day SMA for the first time since mid-December. In recent sessions, however, the momentum has stabilized and the candlesticks have shortened - a sign the recent run-up may be overdone. Should earnings disappoint, look for initial support near $29.00, followed by the 50-Day SMA near $28.50, with further downside risk to $28.00. Resistance is at the recent highs near $30.50, followed by $32.00. (Chart courtesy of StockCharts.com)

Summary

Oracle shares have been climbing higher in recent months, mirroring the broader market advance, along with other names in the software space: MSFT, Adobe (ADBE) and (SAP). Given the surprising miss last quarter, however, the rally has fizzled out ahead of the 3Q 2012 earnings release. Oracle also faces the threat of stiffer competition, weakness in Europe, and concerns over its aggressive push into cloud-computing. But a recent share purchase by hedge fund manager David Tepper, a PEG ratio of just 1.0, an aggressive buyback program, and strength in Latin America and Asia-Pacific have many thinking that Oracle is poised to deliver a solid quarter and set the tone for technology shares in the weeks to come. Note that guidance for the 4Q 2012 period will be disclosed on the ensuing conference call.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.