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Oracle Corporation (ORCL) Analysis
Posted by: Vera Yuan (IP Logged)
Date: September 11, 2013 04:52PM

ORCL is now the most-bought S&P 500 stock of gurus as shown on GuruFocus.com. From the latest guru trades of the second quarter in 2013, we can see Donald Yacktman bought it as new position, Charles de Vaulx, Meryl Witmer, Steven Romick, Glenn Greenberg and so on also added more shares to their portfolio. These trades make me wonder, is it a good buy or not?

Business Description

Oracle Corporation (ORCL), founded in 1977, is a computer technology corporation specialized in developing and marketing enterprise software products and computer hardware systems. It has more than 390,000 customers, including 100 of the Fortune 100, and it has deployments across a wide variety of industries in more than 145 countries around the globe. It is the third-largest software maker by revenue, after Microsoft (MSFT) and IBM (IBM).

Competitive Advantages

1. Cloud Computing

Larry Ellison, Oracle’s CEO, said that “When the Internet fi­rst started, the primary device connected to it was the personal computer. Now we’ve migrated that complexity off the desktop and moved it to Internet servers. That has been recast as cloud computing.”

Rather than view the cloud just as a cost-saving platform, CFOs recognize the strategic benefi­ts that the cloud delivers to get critical growth initiatives up and running quickly, whether that’s using the cloud to quickly upgrade to a new application, or delivering new mobile or analytic capabilities to employees. Recent research con­firms that 35% of companies that have ventured into the Cloud have been able to cut costs as a result.

2. Research and Development

The success of software companies depends primarily on technical expertise and marketing. Research and development have always been a key focus at Oracle. As released for fiscal fourth quarter 2013, Oracle spent 12% of its revenues on research and development. Oracle develops core competencies that lead to higher levels of customer satisfaction. And in this way, it can meet the real needs of customers better than competitors.

3. Marketing and Sales

The marketing in Oracle allows the firm to engage its customers face to face and to learn and understand a customer’s organization, processes and specific requirements. Oracle has more than 10,000 consultants worldwide with the knowledge of how to implement Oracle technology and Oracle applications. It has made a commitment to focusing on the customer in its marketing and sales efforts.

Financial Strength

There are three good signs for ORCL. Its operating margin is expanding. Its current P/E ratio is 14.25, which is close to the 10-year low of 13.02. Its P/B ratio is 3.34, which is close to one-year low of 3.21. You can see the detailed 10-year data charts below.







The above chart indicates that Oracle has enough cash and cash equivalent to pay off all the current liabilities. The cash and cash equivalent it has could almost pay off the total liabilities, including current liabilities, long-term debt and other long-term liabilities.

ORCL’s revenue per share has continued to grow from $1.75 at May 28, 2003m to $7.68 at May 28, 2013, with an average growth rate of 17.6% over the last 10 years. Its earnings per share have also continued to grow from 0.43 in 2003 to 2.26 in 2013, with an average growth rate of 18.0% over the last 10 years.



In our newly introduced dividend page, we can see the current dividend yield is 0.6%, and it ranked higher than 66% of the 1618 companies in the global software – infrastructure industry. ORCL’s dividend payout ratio is 5.31% and it ranked higher than 98% of the 622 companies in the global software – infrastructure industry. Oracle has a 21.3% five-year dividend growth rate.

Management

Larry Ellison has been CEO of Oracle Corporation since he founded the company in 1977. No firm has been as intrinsically associated with its co-founder and CEO apart from Apple and Steve Jobs.

In 2010, Mark Hurd joined Oracle and became president of Oracle Corporation and a member of the company’s board of directors, just after he had fallen out with HP’s board over an unfounded accusation and left. Ellison mentioned at that time, "The HP board just made the worst personnel decision since the idiots on the Apple board fired Steve Jobs many years ago.” Mark Hurd could bring more than 20 years of technology industry leadership, computer hardware expertise and executive management experience to his role with the company.

Safra A. Catz has been president of Oracle Corporation since January 2004, a member of the board of directors since October 2001 and chief financial officer as of April 2011. She was ranked as the 12th most powerful woman in business by Fortune magazine in 2009.

Oracle Corporation’s management team is quite decent and effective. Compared with its competitors (MSFT, IBM, CA, SAP), we can see Oracle has a relatively high ROA of 13.40% and ROE of 24.50%, both ranked higher than 90% of the companies in the global software – infrastructure industry. It also has the highest operating margin of 39.50%, which ranked higher than 99% of the companies in industry, and highest 10-year revenue growth of 17.60%, which ranked higher than 89% of the companies in industry.

Valuation

1. Peter Lynch Fair Value & Peter Lynch Chart

In the top middle part of ORCL’s summary page, we can see the Peter Lynch value for ORCL is $37.63. Peter Lynch thinks that the fair P/E value for a growth company equals its growth rate, that is PEG = 1. The earnings here are trailing twelve month (TTM) earnings. The growth rate we use is the five-year EBITDA growth rate. Then Peter Lynch fair value = PEG * five-year EBITDA Growth Rate * Earnings per Share, which we can get for ORCL is $37.63. This is higher than the current stock price.

As of Sept. 10, 2013, the Peter Lynch Chart is shown below:



From the Peter Lynch chart, we can see for the recent 10 years, each time the stock price was lower than the price at P/E=15, the stock price would go up. This is true for the first quarter of 2009, end of 2011, second quarter of 2012, end of 2012 and first quarter of 2013. Now the stock price is also lower than the projected price, from the historical experience, we might expect that stock price to go up again.

2. Multiple Valuation: Price to Earnings Ratio (PER)



We used the P/E band to get the price range. Over the past 10 years, ORCL was traded between 12.5 to 31.7 times. We used the median PER (price to earnings ratio) band value of 21 to calculate the eventual price. With this method, we got the projected price of ORCL at $47.4. If we use the Peter Lynch P/E=15 to calculate the eventual price, the result is $33.9. The current stock price is $32.8, which is lower than both of the two prices we mentioned earlier.

3. Discounted Cash Flow Intrinsic Value model (DCF)

The details of how we calculate the intrinsic value based on Discounted Cash Flow Intrinsic Value (DCF) are described in detail here. This method smoothes out the free cash flow over the past six to seven years, multiplies the results by a growth multiple, and adds a portion of total equity. Value = (Growth Multiple) * FCF(6 year avg) + 0.8 * Total Equity (most recent).

Using the Discounted Cash Flow Intrinsic Value model (DCF), GuruFocus calculates the intrinsic value for ORCL at $39.2 as of May 2013. The current stock price of ORCL is $32.8. These figures give us a general idea that ORCL is more likely to be undervalued. The stock might have the chance to go up more.

4. DCF Fair Value



In the DCF page for ORCL, we can calculate the DCF fair value using the DCF Fair Value Calculator developed by GuruFocus. The recent earnings per share annual data is $2.26. For a company like ORCL, we believe for the next 10 years the growth rate will still be as high as the earnings growth rate for the past 10 years. The past 10-year growth rate is 18.9%, the five-year growth rate is 21.4%, and the 12-month growth rate is 14.9%. Considering the earnings growth might slow down, to be more conservative, I assume 16% as the growth rate for the next 10 years.

GuruFocus users can set their own growth rate and see what value they can get. We assume the years of terminal growth to be 10 and the terminal growth rate to be 4%. This is because no company can guarantee to continue to grow at a high growth rate forever. It is more reasonable to set this growth rate close to the inflation rate. The long term average return of the stock market is around 11%. Investors can always passively invest in an index fund and get an average return. For ORCL, I assume the stock performance will be better than the stock market. In this way, I assume it to be 12%. GuruFocus users can set their own desired expected return as the discount rate. Putting all these parameters into the calculator, we get ORCL’s fair value to be $49.39, which gives us the margin of safety of 33%.

5. Screeners ORCL Can Pass

According to my recent article, How Many Stocks Can Pass GuruFocus Value Screeners? September 3, 2013, ORCL passed three screeners, which are Undervalued Predictable Companies - Discount Cash Flow and Discount Earnings, Buffett-Munger Screener - Good Companies at Fair or Undervalued Prices and Companies at Historical Low Price/Book Ratios. ORCL is a 5-star business predictable company which is ranked by GuruFocus.

Under Undervalued Predictable Companies Screener, the intrinsic value = book value + future earnings at growth stage + terminal value. The value using the discount cash flow model for ORCL is $80. The value using the discount earnings model is $57. Both mean ORCL is traded at discount.

Without any doubt, Warren Buffett’s investment strategy is the most successful ever. He believes that to buy companies with “predictable and proven” earnings can be very profitable in stock market investing. Based on his strategy, GuruFocus develops the "Buffett-Munger Screener," which helps to find companies with high quality business at undervalued or fair-valued prices:
  1. Companies that have high Predictability Rank, that is, companies that can consistently grow their revenue and earnings.
  2. Companies that have competitive advantages. They can maintain or even expand its profit margin while growing its business.
  3. Companies that incur little debt while growing business.
  4. Companies that are fair valued or undervalued. We use PEPG as indicator. PEPG is the P/E ratio divided by the average growth rate of EBITDA over the past five years.
Under the Buffett-Munger Screener, ORCL is a company with “predictable and proven” earnings and is traded at a discount.

Under Low P/B Companies Screener, its sales and earnings have consistently grown for at least the past decade, yet the P/B ratio is less than 30% above its historical low.

6. Guru Owns

You can access the complete latest gurus’ trades with ORCL here.

In the Yacktman Fund’s second quarter 2013 commentary, it mentioned, “At the end of the quarter we acquired a position in Oracle Corporation (ORCL). Over the last few years we have purchased many positions in established technology companies where the growth rates have slowed but we believe there is significant free cash flow and the valuation is very attractive.”

Glenn Greenberg has a very concentrated portfolio. It only has 11 stocks and he added 13.61% to ORCL. Meryl Witmer is a very famous woman guru who is good at picking up stocks. She is a general partner at Eagle Capital and director of Berkshire Hathaway Inc.

Risks

1. ORCL’s revenue growth has slowed down over the past 12 months, which we need to be careful about.

2. ORCL’s one-year dividend growth rate is -50%. Its three-year dividend growth rate is -15.7%, which ranked lower than 74% of the companies in industry.

3. Oracle focuses a lot on innovation and thinking, yet it needs to advertise it more and use it to leverage client interest in current solutions.

4. Oracle has less control over the international operations than domestic.

Disclosure

I have no current position held at the time of writing. The purpose of this article is purely research for GuruFocus. This is not a recommendation to buy or sell any stock at any given time.

GuruFocus premium membership is needed to access the details of the portfolios and screeners. We also publish a monthly Buffett-Munger newsletter which features the picks from Buffett-Munger Screener. If you are a premium member, you can download this for free. If you are not a Premium Member, we invite you for a 7-day Free Trial.



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Meryl Witmer: Current Portfolio, Stock Picks
Stocks Discussed: ORCL,
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Re: Oracle Corporation (ORCL) Analysis
Posted by: msubks (IP Logged)
Date: September 11, 2013 05:32PM

Very interesting. How do you get data for long term debt metrics?



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Meryl Witmer: Current Portfolio, Stock Picks
Stocks Discussed: ORCL,
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Re Oracle Corporation ORCL Analysis
Posted by: kengolub (IP Logged)
Date: September 11, 2013 07:25PM

Thank you for a well organized and well presented review. I'm more bullish than you, and would point out that ORCL accelerated its dividend payments in 2012. Reason: so major shareholders (e.g., Ellison) could take advantage of low tax rates on dividends, which ended 12/31/12. Anyway, I have little use for dividends, which only cost me in taxes. I'd sooner leave my capital invested in a growth co. earning 20% than collect a taxable 3% dividend I don't even need.

Oracle does in fact advertise, but strategically, with small red ads in major business newspapers. It does not need MSFT/Apple-style ads because it doesn't sell to the general public. ORCL clients are businesses which make colder, more objective purchase decisions. There is also a huge conversion cost in changing database programs, which keeps ORCL claws deeply embedded in clients; a proverbial moat.

Most of all, clients I've talked to tell me ORCL personnel know what they're doing, are tenacious in their efforts to resolve client problems, and never cease their efforts to improve already-solid systems.



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Meryl Witmer: Current Portfolio, Stock Picks
Stocks Discussed: ORCL,
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Re Oracle Corporation ORCL Analysis
Posted by: ecotycoon (IP Logged)
Date: September 11, 2013 10:04PM

Once again you wright a master piece Vera, great analysis using the efficient gurufocus tools :)

Here’s a recent interview with Larry Ellson worth to be watch for apple and oracle investor just as well as America’s cup fans:

http://www.charlierose.com/watch/60254508



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Meryl Witmer: Current Portfolio, Stock Picks
Stocks Discussed: ORCL,
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Re Oracle Corporation ORCL Analysis
Posted by: stevenramsey (IP Logged)
Date: September 12, 2013 03:02PM

I'm not an owner, but I have given the company a look. It is interesting to compare Lou Simpson buying Oracle and Warren Buffett buying IBM. Oracle has $37B of revenue while IBM has $102B. Oracle's operating margin is 40% operating margin vs. IBM's 21%. And the real kicker, Oracle generates $12.9B of FCF relative to IBM's $13.9B. Looking back, Oracle's revenue has tripled since 2005 while IBM's has barely moved up ($91B of revenue in '05).

Valuation-wise, Oracle sells for cheaper on an EV/EBIT:

Oracle - 9.7x
IBM - 11.1x

This is a shallow way of looking at it, but if one is starting from those financial highlights, Oracle is a clear winner. It will be interesting to see how these play out.



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Meryl Witmer: Current Portfolio, Stock Picks
Stocks Discussed: ORCL,
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Re Oracle Corporation ORCL Analysis
Posted by: vgm (IP Logged)
Date: September 12, 2013 03:58PM

Steven,

An argument which often gets made to rationalize Buffett's IBM purchase is that IBM is more of a services company now than a tech outfit. Is it possible that Oracle is more dependent upon tech innovation (the cloud, etc) than IBM, and so less predictable on Buffett's timescale (10-20 or more years out)?

PS More humorously, maybe there will only ever be ONE oracle in Omaha...



Guru Discussed: Glenn Greenberg: Current Portfolio, Stock Picks
Meryl Witmer: Current Portfolio, Stock Picks
Stocks Discussed: ORCL,
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