Oracle: Safe bet in a cautious market

This technology bellwether is a cash machine and a solid play in an uncertain environment.

By TheStockAdvisors Jun 25, 2012 12:14PM
By Geoffrey Seiler, BullMarket.com

Oracle (ORCL), the database and business software giant, reported its fiscal fourth-quarter results last week and we wanted to circle back and take a closer look.

The technology bellwether delivered better-than-expected results and guided a bit above the consensus for the current quarter, but more than anything it showed that its large corporate customers are continuing to spend on IT infrastructures.

As was the case with the prior quarter, Oracle's core software business, which is largely driven by agreements with large corporate customers to maintain their databases and other applications, remained strong.

Meanwhile the hardware business it picked up via its acquisition of Sun Microsystems reported lower sales year-over-year, but its first sequential increase since the company came under the Oracle umbrella.

Oracle earned $3.45 billion, or 69 cents per share, for the three months ending in May. That compared to income of $3.2 billion, or 62 cents per share, at the same time last year.

Oracle remains a cash machine. Its operating cash flow grew to a record $13.7 billion for the full fiscal year, while free cash flow equaled $13.1 billion, up 22% from the previous year. The company ended the quarter with nearly $31 billion in cash and marketable securities.

Oracle's board agreed to return some of that cash to shareholders by approving an additional $10 billion stock repurchase authorization, which comes on top of the $3.2 billion it had left in its prior program. The board also declared a quarterly dividend of 6 cents per share.

Overall, this was another solid quarter that helped diffuse the notion that large companies are slashing their IT budgets, particularly the ones headquartered in Europe.

There are plenty of large European companies that derive much of their revenue from beyond the continent -- think of drug makers like Novo Nordisk and Bayer AG or automakers BMW and Mercedes -- that aren't going to sit still because Europe's economy is wobbling.

We view Oracle as a solid large cap tech stock, but not a hyper-growth kind of company. It does have the reputation of having one of the best sales forces in the industry.

It also has a CEO in Larry Ellison that isn't afraid to spend a few billion to buy companies he thinks can grow his empire. The jury is still out on the Sun deal, and one never knows when his trigger finger might get itchy again, but the past acquisitions of Seibel and PeopleSoft have worked out.

As a large cap tech stock, Oracle's stock isn't likely to outperform a hot upstart when sentiment is bullish, but in a period when the mood of investors can best be described as "cautious," it can be a relatively safe bet.   

Trading at less than 10 times the consensus earnings-per-share estimate for the year ending May 31, 2014, the stock is not particularly expensive. In the past it has traded at an average of around 14 times future earnings.   

Using a more modest 12 times multiple would suggest the stock has the potential to trade to $40 in an expanding economy; even an 11 times multiple puts it in the mid $30s, which is probably a more reasonable target given modest anticipated global economic growth.

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