Oracle Can Handle Even The Foulest Weather


  Recent Price


  P/E Ratio
  Shares (millions)
  Long-Term Debt as % of Capital
  52-Week Price Range
$23.62 - $15.00

Longtime CEO Larry Ellison has cast Oracle ($16; ORCL) in his own likeness: brash, bold, and successful. The helmsman relishes taking on the sea and wind in competing for the America’s Cup, while his software company is known for challenging industry stalwarts or grappling for control of other companies.

Cross-marketing its database programs and a portfolio of software applications, Oracle follows a blueprint similar to the one Microsoft ($18; MSFT) used to build its franchise. But despite its aggressive approach to business, Oracle has plenty of defensive characteristics.

The company generates strong free cash flow and holds $10.65 billion, or $2.05 per share, in cash. Moreover, exposure to the global banking market is limited to about 5% of revenue, suggesting Oracle’s book of business can survive a slowdown in spending by financial companies. Oracle is a Buy and Long-Term Buy.

Rough waters, sturdy boat
A broad mix of software and services positions Oracle to fill its sails during the first gusts of a recovery. Less than half of revenue comes from North and South America, and Oracle operates in many of the world’s high-growth regions.

Software generates 80% of sales, with the rest coming from services. Within the software segment, Oracle sells databases and middleware (71% of sales) and applications (39%).

In the November quarter, software revenue grew 14% at constant currency. New software licenses — an indicator of future revenue streams for upgrades and maintenance — increased 5%. Renewal rates for Oracle’s maintenance services held steady, while revenue from software license updates and product support rose 20% at constant currency. In the applications business, fewer customers are signing huge, multiyear contracts, though Oracle continues to secure smaller contracts.

Growth opportunities abound
Growing by acquisitions is risky, but Oracle has managed to gain scale without sacrificing profitability. The company spent more than $35 billion on acquisitions in the last four years, and operating profit margins have improved during that period. Oracle, which likes to buy smaller rivals at low prices during tough times, is currently considering several deals.

New products also show promise. In November, Oracle began selling hardware — computers loaded with its database software. Oracle says the computers operate databases 10 to 72 times faster than current systems.

Headwinds will likely slow growth in the systems-software market in 2009, as businesses cut back on spending. In such an environment, big, broad companies like Oracle are your best bets to hold a steady course.

Consensus estimates project per-share earnings will climb 9% on 5% revenue growth in both fiscal 2009 ending May and fiscal 2010. A stepped-up program of stock buybacks could further boost per-share profits.

Oracle trades at 11 times estimated year-ahead earnings, below the three-year average forward valuation of 16. An annual report is available from 500 Oracle Parkway, Redwood City, CA, 94065; (650) 506-7000;

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