Oracle: Shelter from the storm

Solid finances and a low valuation make this tech leader a long-term buy in a difficult market.

By TheStockAdvisors May 23, 2012 12:07PM
Image: Hurricane (© Digital Vision Ltd./SuperStock)By Richard Moroney, Dow Theory Forecasts

With spring storms washing away some of the market's first-quarter gains, investors should consider Oracle (ORCL), a company equipped to handle choppy waters.

Five of Oracle's six Quadrix category scores (our proprietary rating system) rank in the top 25% of our research universe, reflecting steady operating momentum, a strong balance sheet, and compelling valuation.

Software licenses provide reliable revenue streams. And Oracle's services and hardware segments help clients trim costs and keep their profit margins high.

Tech bellwether Cisco Systems (CSCO) recently said many enterprise customers have postponed spending as they wait for clarity on Europe's economic weakness.

Although Cisco's clients expect to increase spending in the second half of 2012, those plans could change if the global environment worsens.

Cisco's comments echo the conservative stance taken by industry researcher Gartner, which last month lowered its 2012 outlook for global tech spending to 2.5% growth from 3.7%. A global slowdown could affect demand for Oracle's products.

However, demand held up during the last recession as companies, motivated to prop up profits in the absence of economic growth, sought out technology solutions to slash costs.

Indeed, Oracle is one of just three S&P 500 Index tech companies to grow annual sales, net income, and operating cash flow for six consecutive years.

Moreover, SAP's weak March-quarter results suggest Oracle is taking applications market share away from its rival.

Software accounts for about two- thirds of Oracle's sales, while consulting and cloud services generate 12%. The hardware business (19%) will continue to face an uphill battle, with the company projecting a sales decline of 15% to 25% in the May quarter.

But management has consistently said it will sacrifice less-profitable products to restore Oracle's profit margins to levels enjoyed before the Sun Microsystems deal. Margins have risen year-over-year in each of the last five quarters.

Eight straight quarters of free-cash-flow growth have given Oracle a pool of nearly $3 per share in cash net of debt, 11% of the stock price and up from $0.35 per share two years ago.

Oracle's price-to-earnings ratio hovers near its lowest level in more than a decade. At 11 times trailing earnings, the stock trades 40% below its three-year average and 18% below the median for systems-software stocks in the S&P 1500 Index.

As a maturing tech titan, Oracle's growth has decelerated in recent years, and some worry that clients will gradually shift toward cloud-based applications offered by competitors who don’t require long-term service agreements.

Still, consensus estimates project per-share profits will rise 9% in fiscal 2013 ending May and 12% annually over the next five years. We continue to rate the stock a "long-term buy."

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