Romick, Yacktman and Witmer typically tread cautiously and never follow where the crowd goes, as evidenced in their return performance. All three avoided the worst of the 2008 crash, losing far less than the market’s 37% plunge that year. Steven Romick put his view frankly in his 2008 investor letter: “We do not see opportunities in equities today, relatively speaking.” He also enlarged his fund’s cash position to 38.5% by the end of the year to await better opportunities.
This year, Romick’s buying was notably sparse. He bought only two new stocks and increased his position in four others, including Oracle. Romick bought 2,665,400 shares, increasing his position to 8.83 million shares.
Yacktman in the second quarter also only purchased two new stocks in the second quarter, one of which was Oracle, at 7,105,000 shares, or 2.4% of his fund. Witmer, a buyer of two new stocks as well, increased her existing Oracle position by 44.67%. She began buying into the company in the fourth quarter of 2011 and has been increasing the position in each quarter since, making it 5.8% of her portfolio.
Several key aspects of the company and its valuation may appeal to the trio at this time.
Oracle is a provider of hardware and related services, and the largest provider of enterprise software. The company has also made significant strides in the area of cloud computing technology. It has a $150.84 billion market cap and competes with companies such as Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM), Intel (NASDAQ:INTC), Hewlett-Packard (HPQ) and salesforce.com (NYSE:CRM) to meet increasing customer demand for simpler, lower-cost software and hardware systems.
Oracle would not likely appear in Warren Buffett’s portfolio in the near future, as many of its market segments have low barriers to entry, creating the constant threat of new technologies and challenges from outsiders.
Oracle’s revenue has been growing over the past five years, helped by its many acquisitions. Revenue showed a wider jump from 2010 to 2011 due to the 2010 purchase of Sun Microsystems Inc.
From 2009 to 2013, the company’s total revenue increased from $23.25 billion to $37.18 billion, net income from $5.59 billion to $10.93 billion and total assets from $47.42 billion to $81.81 billion. Its dividend grew in tandem, from $0.05 per share to $0.30 per share annually.
Meanwhile, its stock price moved 51.46%.
The company also has enormous financial strength, with more than $38 billion on its balance sheet and $18.5 billion in aggregate indebtedness as of March 31, 2013, to mature between calendar year 2013 and 2040.
Oracle’s price, revenue and cash history:
In spite of these factors, the company trades at historical low valuations: Its P/E ratio landed near a 10-year low at 14.6 and P/B ratio near a one-year low at 3.36 this week.
Oracle’s 10-year P/E, P/S and P/B ratios:
Another highlight is its Peter Lynch chart status. The chart shows the company trading at a slightly undervalued level – a rare occurrence:
The source of revenues at Oracle has been shifting in recent years. Its software business represented 74% of total revenues in fiscal 2013, compared to 68% in 2011. The business contains both its new software licenses and cloud software subscriptions and software license updates and product support segments. Continued growth is expected in these segments due to continued demand for the products and services they provide, and planned acquisitions.
In the same period, Oracle’s hardware systems business dwindled to 14% of its revenue in 2013, compared to 19% in fiscal 2011. Both the hardware systems products and hardware systems support fall under the hardware systems business category. The company expects lower operating margins as a percentage of revenue here than its software side going forward due to higher costs.
Finally, the services business, comprising its consulting services, managed cloud services and education services, represented 12% of total revenue in fiscal 2013 and 13% in 2011.
Revenue growth has slowed at the company in the most recent several years. From 2012 to 2013, revenue was essentially flat at $37.2 billion, with software increasing 5%, and hardware systems falling 15% and service 7%.
In the fourth quarter of fiscal 2013, Oracle’s cloud business showed continued growth, as HCM Cloud, CRM Cloud and ERP Cloud increased 50% and 500 new software as a service (SaaS) customers. Its annualized SaaS revenue run rate sprung above $1 billion, making it the second largest cloud applications business.
The company also took market share from its biggest competitor, IBM P-Series, in its engineered systems business, which grew at a rate of 45% in the fourth quarter. The company forecasts further growth in its hardware business in fiscal year 2014.
Oracle shares dipped approximately 9% on the report of its fourth quarter results in June.
In its fourth quarter results, the company announced it would double its quarterly cash dividend to $0.12 per share of outstanding stock, and buy back up to an additional $12 billion of its common stock.
See Donald Yacktman’s Yacktman Fund portfolio here, Meryl Witmer’s portfolio here and Steven Romick’s portfolio here.
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