Oracle’s Earnings Preview

After the closing bell, Oracle ($ORCL) is due to report its fiscal Q3 earnings. This is for the quarter that ended on February 28th.

When the very-strong second-quarter earnings report came out in December, the company said to expect EPS for Q3 to be between 48 cents and 50 cents. Wall Street had only been expecting 44 cents per share, and a year ago Oracle released earnings of 38 cents per share. For Q3, the company said that revenue growth will be between 31% and 35%.

Personally, I think the company is low-balling the Street which is understandable. Remember that for Q2, Oracle said to expect EPS between 46 and 48 cents. Instead, they earned 51 cents per share.

My estimate is that Oracle will report earnings of 53 cents per share. I’ll also be curious to hear what they have to say about Q4. A year ago, Oracle earned 60 cents per share. Wall Street currently expects 66 cents per share for this year’s fourth quarter. I strongly doubt Oracle will only grow its earnings by 10%.

Even if the company low-balls the Street again, which it will, I still think they can offer guidance of 70 cents per share. We can also expect to hear some strong words from Mr. Ellison:

This quarter, some analysts expect brash talk about Hewlett-Packard, which under new Chief Executive Leo Apotheker is set to focus more on services and software, which will bring it directly into competition with Oracle in some core markets.

Oracle, headed by outspoken and combative Silicon Valley billionaire Larry Ellison, is likely to shoot back on Thursday.

“I’d be very surprised if you don’t get some very competitive talk about HP’s plans,” said Michael Yoshikami at YCMNET Advisors, noting that Oracle has a history of colorful remarks about beating its competitors, such as Germany’s SAP and International Business Machines Corp .

Like IBM and Cisco Systems Inc , Oracle and Hewlett-Packard are aiming to provide the infrastructure for companies to move toward “cloud computing,” where data is handled remotely in datacenters rather than on premises.

The looming battle between Oracle and Hewlett-Packard is given spice by the fact that HP’s former chief executive Mark Hurd — who left last year after a flap over inaccurate expense reports and a questionable relationship with a female contractor — now works at Oracle.

Wall Street expects Oracle’s fiscal third-quarter profit excluding one-time items to jump to 50 cents per share, according to Thomson Reuters I/B/E/S, up from 38 cents a year ago. The company itself said in December it expected between 48 cents and 50 cents.

Analysts have forecast $8.7 billion in revenue, up from $6.5 billion a year ago, although that quarter only included one month of hardware sales from the Sun acquisition, which closed in January 2010.

Some analysts warn that Oracle’s new exposure to hardware, through the Sun deal, means it may suffer from supply chain problems caused by Japan’s earthquake, which has constrained production of key computer components.

Oracle may also see some weakening of demand for its software in Japan, which accounted for 5 percent of sales last fiscal year, but analysts do not expect that to offset industry growth.

“Unless one wants to make a more aggressive assertion that either whole companies will cease to exist or the world is headed back into another Great Recession,” said Richard Davis, an analyst at Canaccord Genuity, “we side with the view of every software company with whom we have spoken — that they do not expect a material negative impact to underlying, almost universally favorable, demand trends.”

Here’s a look at Oracle’s stock and earnings. The stock is the blue line (left scale) and the EPS is the gold line (right scale). The two lines are scaled at a ratio of 15-to-1.

You can see that the earnings line was barely impacted by the recession. The future part of the gold line is based on Wall Street’s consensus which I think is too low.

If Oracle earns $2.31 for next fiscal year, which Wall Street expects, at a multiple of 16, that comes to nearly $37. If Oracle can earn $2.50, which isn’t out of the question, that’s a share price of $40.

Posted by on March 24th, 2011 at 11:18 am


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