Oracle Earnings Preview: The Stock Has Outperformed The Market, But The Sentiment Is More Bearish

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About: Oracle Corporation (ORCL)
by: Rick Pendergraft
Summary

Oracle is set to report fiscal fourth quarter earnings on Wednesday after the closing bell.

The company has consistently grown earnings and has strong management efficiency measurements.

Three different sentiment indicators have all grown more bearish in the last nine months.

Software giant Oracle (ORCL) is set to release fiscal fourth quarter earnings on Wednesday, June 19 after the closing bell. Analysts expect the company to report earnings of $1.07 per share on revenue of $10.95 billion.

The company has a history of beating estimates by a few pennies each time it announces earnings, but in the last few years, the stock has gapped lower after four earnings reports, and it has only gapped higher on one occasion. After the last three earnings reports, the stock hasn’t really gapped at all.

Over the last three years, Oracle has been pretty consistent with its earnings growth. The company has seen the EPS grow by 10% per year on average, and the earnings grew by 7% in the third quarter.

Sales haven’t been as consistent with an average annual growth rate of 3% in the last three years, but revenue was down 1% in the third quarter of 2019 compared to the same period of 2018. The current revenue estimate does reflect a 2.7% decline in revenue compared to the fourth quarter of ’18.

The earnings and sales growth may be in the average to slightly above average range, but one area where Oracle ranks well above average is in the management efficiency measurements. The company boasts a return on equity of 26.2% and a profit margin of 41.5%.

All in all, Oracles ranks above average from a fundamental perspective.

Oracle Has Outpaced the Market Over the Last Three Quarters

Looking at the chart of Oracle, nothing really jumps out at you that suggests it has been a great investment. But the fact of the matter is the stock has been outperforming the S&P 500 since the beginning of the third quarter in 2018.

Sure, the stock dipped a little in the fourth quarter, but it didn’t fall as much as the overall market. Like the overall market, it has rallied from the December low and then it fell in May. The chart for Oracle looks very similar to the chart of the S&P.

ORCL SA4.png

If you dig into the numbers a little, what you will find is that since September 1, 2018, through the close on June 11, Oracle gained 12.9% while the S&P was down 0.5%. From the Christmas Eve low, Oracle is up 27.4% while the S&P is up 22.7%. Again, that is through the close on June 11.

As for the weekly chart itself, there are a couple of items that stood out to me. From March 2017 through February 2019, the stock was locked in a range between $42 and $52. It finally broke above the $52 level and moved up to $55.53 in April.

I also took note of how the $50 level acted as resistance at the beginning of the range-bound period back in 2017. The stock dipped down to the $50 mark at the beginning of June before bouncing. This area intrigues me a little as it could be a case of former resistance acting as support. It is just far enough below the old top of the range of $52 that it could be leading to false breakdowns. The $52 area provided a couple of instances that look like false breakouts as we look back now.

The Sentiment Has Grown More Bearish

This is the third time I have written an earnings preview on Oracle, and the one thing that has changed the most is the sentiment toward the stock. I wrote about the company in September and in December. In September, the short interest ratio was at 3.74, and in December, it was down to 1.89. The current ratio is at 4.4 and the number of shares sold short jumped from 48.3 million to 54.4 million in the second half of May. This is a sign that pessimism is growing toward the stock.

In September and in December, the analysts' ratings showed 26 “buy” ratings, nine “hold” ratings, and one “sell” rating in both time frames. I have changed sources for my overall analysts’ ratings, so we aren’t comparing apples to apples here, but there are more “hold” ratings than “buy” ratings now. According to the Wall Street Journal, there are 35 analysts following the stock now. There are 11 “buy” ratings, 20 “hold” ratings, and four “sell” ratings currently.

Again, the current numbers are from the Wall Street Journal and the old numbers are from a different source, but either way, the overall buy percentage is well below average. We are looking at 11 out of 35 total ratings, which is only 31.4%. The average buy percentage for a stock like Oracle is typically in the 65% to 75% range.

ORCL Analysts Ratings.jpg

The put/call ratio is yet a third sentiment indicator that has been moving to a more bearish posture. The current reading is 1.44 with 281,574 puts open and 195,604 calls open. The ratio was at 0.70 in September, and that is an average ratio. The ratio jumped to 1.15 in December, and that is above average. The current ratio is well above average.

What we see is that all three sentiment indicators are more bearish than the average stock, and they have grown more bearish in the last nine months - a nine-month period where the stock has outperformed the overall market by a significant margin.

My Overall Take on Oracle

I don’t see any reason for Oracle not to continue outperforming the market. If we go through another downswing like we saw in the fourth quarter, I look for the stock to hold up better than the average stock. If the market continues higher, Oracle should move higher as well.

If you own the stock already, I suggest holding on to it. If you don’t own the stock yet but are looking to buy it, I don’t think you have to buy it ahead of the earnings report. Given the history of gapping lower more times than gapping up, I can see waiting until after the report to buy the stock- just in case.

One item I haven’t mentioned about Oracle that I like is a recently announced partnership with Microsoft (NASDAQ:MSFT). The two companies are going to work together with their cloud-based software enterprises. Customers will be able to use Microsoft Azure and Oracle Cloud in a seamless integration.

Microsoft and Oracle are both among the leaders in cloud-based computing. To have the two of them working together should only help them grow stronger.

I look for Oracle to continue moving higher after the earnings report and well into the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.