Sunday, December 27, 2009

Oracle Corporation: The Road to Recovery

As the economic rebound further develops, the technology sector will play a leading role. Oracle Corporation, a bellwether in the tech sector will be a prominent leader. We believe there are a number of value drivers for the coming year:

• The acquisition of Sun Microsystems will be completed. This will expand Oracle’s product line to include not only hardware that is optimized to run Oracle databases but also Sun’s open source software products.
• Oracle continues to introduce new product such as the recently announced Communications Marketing and Advertising product.
• Analysts are placing too much emphasis on 3Q10 revenue and currency adjustments. Given economic constraints and currency fluctuations, short term results are inconsequential.

For a detailed financial analysis of Oracle, go here.

Summary

We believe Oracle is currently mispriced. We believe the company is trading at a discount to its intrinsic value of $37.79.

• The P/E TTM of 21.7 is in line with the company’s seven year average P/E of 21.8X and below the industry median of 23.2X
• Though sales are down about 1.3% for the TTM as compared to FY09, sales for 3Q10 are up about 4.5% over 3Q08.
• Gross margin, at 81.1% are higher than those in any year since FY05. Similarly, both operating and net margins are currently higher than in previous years.
• Oracle’s financial condition is strong with a current ratio of 3.0X, interest coverage at 13X and long-term debt to equity at a manageable 49.9%.
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