Oracle Offers Shelter From Market Storm

5/21/2012


  Recent Price
$27
  Dividend
$0.24
  Yield
0.9%
  P/E Ratio
11
  Shares (millions)
5,080
  Long-Term Debt as % of Capital
25%
  52-Week Price Range
$34.60 - $24.72

With spring storms washing away some of the market's first-quarter gains, investors should consider Oracle ($27; ORCL), a company equipped to handle choppy waters. Software licenses provide reliable revenue streams. And Oracle's services and hardware segments help clients trim costs and keep their profit margins high.

Five of Oracle's six Quadrix category scores rank in the top 25% of our research universe, reflecting steady operating momentum, a strong balance sheet, and compelling valuation. The stock is a Long-Term Buy.

Peering through dark clouds

Earlier this month, tech bellwether Cisco Systems ($17; CSCO) said many enterprise customers have postponed spending as they wait for clarity on Europe's economic weakness. Although Cisco's clients expect to increase spending in the second half of 2012, those plans could change if the global environment worsens.

Cisco's comments echo the conservative stance taken by industry researcher Gartner, which last month lowered its 2012 outlook for global tech spending to 2.5% growth from 3.7%. A global slowdown could affect demand for Oracle's products.

However, demand held up during the last recession as companies, motivated to prop up profits in the absence of economic growth, sought out technology solutions to slash costs. Indeed, Oracle is one of just three S&P 500 Index tech companies to grow annual sales, net income, and operating cash flow for six consecutive years. Moreover, SAP's ($61; SAP) weak March-quarter results suggest Oracle is taking applications market share away from its rival.

In the February quarter, Oracle's sales of new licenses — the lifeblood of future revenue growth — climbed 7%. Software accounts for about two-thirds of Oracle's sales, while consulting and cloud services generate 12%.

The hardware business (19%) will continue to face an uphill battle, with the company projecting a sales decline of 15% to 25% in the May quarter. But management has consistently said it will sacrifice less-profitable products to restore Oracle's profit margins to levels enjoyed before the Sun Microsystems deal. Margins have risen year-over-year in each of the last five quarters.

Eight straight quarters of free-cash-flow growth have given Oracle a pool of nearly $3 per share in cash net of debt, 11% of the stock price and up from $0.35 per share two years ago.

Conclusion

Oracle's price/earnings ratio hovers near its lowest level in more than a decade. At 11 times trailing earnings, the stock trades 40% below its three-year average and 18% below the median for systems-software stocks in the S&P 1500 Index.

As a maturing tech titan, Oracle's growth has decelerated in recent years, and some worry that clients will gradually shift toward cloud-based applications offered by competitors who don't require long-term service agreements. Still, consensus estimates project per-share profits will rise 9% in fiscal 2013 ending May and 12% annually over the next five years. An annual report for Oracle Corp. is available at 500 Oracle Parkway, Redwood City, CA, 94065; (650) 506-7000; www.oracle.com.

ORACLE
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Feb '12
0.62
vs.
0.54
+ 3%
32.24
-
24.91
14 - 11
Nov '11
0.54
vs.
0.51
+ 2%
33.81
-
25.71
15 - 11
Aug '11
0.48
vs.
0.42
+ 12%
34.30
-
24.72
15 - 11
May '11
0.75
vs.
0.60
+ 13%
36.50
-
29.62
18 - 14
           
Year
(May)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
35.62
2.22
0.21
36.50
-
21.24
16 - 10
2010
26.82
1.67
0.20
26.63
-
19.47
16 - 12
2009
23.25
1.44
0.05
23.62
-
13.80
16 - 10
2008
22.43
1.30
0.00
23.31
-
18.18
18 - 14
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
97
82
79
95
83
92
24

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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