Oracle Has Sun In Hand, Wind At Back

2/21/2011


  Recent Price
$33
  Dividend
$0.20
  Yield
0.6%
  P/E Ratio
17
  Shares (millions)
5,117
  Long-Term Debt as % of Capital
30%
  52-Week Price Range
$33.59 - $21.24

Oracle ($33; ORCL) sees big opportunities for its Exadata database machine, which handles online transactions and data warehousing for such companies as Bank of America ($15; BAC), Merck ($33; MRK), and Procter & Gamble ($64; PG). Management boasts that Exadata runs Oracle software faster than any rival product. In December, Oracle estimated that Exadata's order pipeline had risen by a third to nearly $2.0 billion, helped by existing customers buying new machines.

This new device encapsulates a trend pervasive in the sector and specific to Oracle. Tech companies are rushing to bundle hardware with software and services on the theory that integration lowers costs and provides better performance. Exadata is the fruit of Oracle's most ambitious acquisition to date, the $7.4 billion purchase in January 2010 of Sun Microsystems, whose hardware division now manufactures the machine.

Oracle has grown sales and per-share profits at an annualized rate of 20% over the last five years. Revenue, boosted by the Sun deal, jumped 47% and per-share earnings 40% in the six months ended November. Despite all that growth, the shares trade at 17 times trailing earnings, 18% below their five-year average. Oracle, a Long-Term Buy, represents an attractive pick for two- to three-year gains.    

The business

Oracle's software business (65% of revenue in the six months ended November) sells databases, middleware, and applications to businesses, government agencies, and schools. Middleware helps bridge the gap between computers and networks. New software licenses rose 22% in the six months ended November, expanding Oracle's base of renewable contracts for software updates and support.

The hardware business (21%) includes the Solaris operating system, computer servers, and storage products. Storage products manage, protect, and archive customer data. Oracle's services (14%) generate lower profit margins than the software business.

Operating profit margins, hurt by the Sun acquisition, fell to 32% in the November quarter from 37% a year earlier. Profitability at the hardware unit has improved since the deal closed as Oracle shed lower-margin businesses. Management says it is confident it can restore margins to levels seen before the Sun deal.

The outlook

For the February quarter, Wall Street sees Oracle earning $0.49 per-share, up 29% on 34% higher sales. December-quarter results posted by Oracle's rivals indicate robust corporate spending on technology. And Gartner ($37; IT) has raised its 2011 forecast for total tech spending, now projected to climb 5% to $3.6 trillion. Oracle, even after it laps the pre-Sun comparisons, seems capable of growing at a faster rate.

Oracle has said it will continue to acquire intellectual property, including more hardware. In October it purchased a 10% stake in Mellanox, an Israeli company that builds equipment for data centers. An annual report for Oracle Corp. is available from 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
Nov '10
0.51
vs.
0.39
+ 47%
29.82
-
22.10
17 - 12
Aug '10
0.42
vs.
0.30
+ 48%
24.68
-
21.24
15 - 13
May '10
0.60
vs.
0.46
+ 39%
26.63
-
21.55
17 - 14
Feb '10
0.38
vs.
0.35
+ 17%
25.64
-
21.62
17 - 14
Year
(May)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
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
2007
18.00
1.01
0.00
19.75
-
13.07
20 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
91
90
48
94
87
59
71

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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