Oracle Charts Winning Course

9/26/2011


  Recent Price
$30
  Dividend
$0.24
  Yield
0.8%
  P/E Ratio
13
  Shares (millions)
5,150
  Long-Term Debt as % of Capital
26%
  52-Week Price Range
$36.50 - $24.72

Oracle ($30; ORCL) CEO Larry Ellison's brash outbursts command headlines, but his strong hand on operations draws the attention of investors. License updates and support services provide a growing stream of recurring revenue, sparking increases in operating income, operating cash flow, and sales in each of the last eight fiscal years ended May. In six of those eight years, sales growth exceeded 15%.

Some of that growth stems from acquisitions. More than $30 billion spent on deals in the past few years has filled out Oracle's software portfolio and provided a substantial hardware business. But Oracle does not depend entirely on acquisitions. Organic growth in licensing revenue reached 11% in fiscal 2011 ended May, the highest rate in two years. And Oracle has pumped 11% to 14% of annual revenue back into research and development in each of the last 10 fiscal years. Oracle is a Focus List Buy and a Long-Term Buy.

Results extend momentum

Oracle said August-quarter earnings rose 14% to $0.48 per share excluding special items, topping the consensus by a penny. Revenue increased 12% to $8.37 billion. Sales of new software licenses jumped 17%, offsetting a 5% decline in hardware products. Operating cash flow grew for the sixth consecutive quarter, rising 42% to $5.42 billion.

Predictably, operating profit margins dipped last year following Oracle's acquisition of Sun Microsystems and its lower-margin hardware business. But margins have improved in three consecutive quarters as Oracle continues to integrate Sun's business, shed less-profitable units, and de-emphasize low-margin products.

Investors' concerns remain focused on hardware, which has experienced weakness in Europe. Moreover, rival IBM ($175; IBM) said its servers took market share from Oracle in the three months ended June.

The hardware unit's gross profit margins are steadily improving, evidence of Oracle's expertise at folding new companies into its existing operations. Also helping is the increasing popularity of Oracle's Exadata machine, which comands higher margins than most of the segment's products.

Exadata and Exalogic integrate database and middleware software with hardware. More than 1,000 Exadata machines have been installed, and Oracle expects to sell 2,000 more in fiscal 2012. Technology executives surveyed by Credit Suisse in May indicated many are eager to adopt the new technology, which improves server performance and lowers storage costs.

Conclusion

At 13 times trailing earnings, the stock trades near its lowest P/E ratio in more than a decade. If the P/E expands just 9% to 14 — still 25% below the three-year average — and the company meets the consensus profit estimate for fiscal 2012, the stock stands to rise 18% over the next nine months. The 2012 consensus profit estimate of $2.40 per share implies 8% growth. That target sounds conservative, and Oracle has topped the consensus in each of the last five quarters. 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
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
Feb '11
0.54
vs.
0.38
+ 37%
33.71
-
27.41
18 - 14
Nov '10
0.51
vs.
0.39
+ 47%
29.82
-
22.10
17 - 12
Year
(May.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
35.62
2.22
0.20
36.50
-
21.24
16 - 10
2010
26.82
1.67
0.15
26.63
-
19.47
16 - 12
2009
23.25
1.44
0.00
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
92
88
65
96
85
16
54

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


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