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Measured Approach

ORACLE CORPORATION (NASDAQ:ORCL) Data as of: 12/25/2009


Industry: Software and Programming

Current Data
Current Price $24.95 PEG 1.3
Market Cap ($M) $125,029.9 EPS TTM ($) $1.15
Shares Outstanding (M) 5,010.0 P/E TTM 21.7X
Institutional Holdings % 59.9% EPS Estimated 2010 ($) $1.58
Insider Holdings % 23.5% P/Estimated EPS 15.8X
Beta 0.93 MA Value ($) $37.79
Latest Quarter Reported 11/30/2009 Dividend Yield % 0.8%

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.

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%.

Recent Developments

Thomson Reuters reports the following recent developments:

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Oracle Corporation Issues Q3 2010 Outlook In Line With Analysts' Estimates-
Conference Call
Thursday, 17 Dec 2009 05:00pm EST
Oracle Corporation announced that for third quarter of 2010, it expects total revenue growth on a
non-GAAP basis to range from 3%-6% at current exchange rates and negative 3% to flat in
constant currency. On a GAAP basis it expects total revenue from 4%-7% at current exchange
rates and negative 2% to positive 1% in constant currency. Non-GAAP earnings per share (EPS)
is expected to be $0.36-$0.38, assuming current exchange rates and from $0.33-$0.35 in
constant currency. GAAP EPS for the third quarter of 2010 is expected to be $0.26-$0.28 using
current exchange rates and $0.23-$0.25 assuming constant currency. The Company reported
revenues of $5.504 billion in third quarter of 2009. According to Reuters Estimates, analysts were
expecting the Company to report revenues of $5.775 billion and non-GAAP EPS of $0.37 for the
same period.

Oracle Corporation Declares Cash Dividend


Thursday, 17 Dec 2009 04:02pm EST
Oracle Corporation announced that the Company's Board of Directors declared a cash dividend
of $0.05 per share of outstanding common stock to be paid to stockholders of record as of the
close of business on January 19, 2010, with a payment date of February 9, 2010.

EU Warms To Oracle Corporation's $7 Billion Purchase Of Sun Microsystems,


Inc.-DJ
Monday, 14 Dec 2009 01:21pm EST
Dow Jones reported that EU regulators signalled they could clear Oracle Corporation's $7 billion
takeover of Sun Microsystems, Inc. after the U.S. software company promised measures to ease
competition concerns. The European Union's executive European Commission said it was
optimistic a satisfactory outcome was possible. It had previously objected to the deal, citing
possible competition constraints on Sun's MySQL database after the takeover .

Oracle Corporation Launches Oracle Communications Marketing and


Advertising
Monday, 7 Dec 2009 05:00 am EST
Oracle Corporation announced the general availability of Oracle Communications Marketing and
Advertising, a new application that enables network operators to securely execute targeted
mobile advertising and marketing campaigns.

Financial Analysis

An essential step in the valuation of any company is an analysis of its financial


performance over time. Analyzing a company’s financial statements provides an
indication of historical growth, liquidity, leverage, and profitability, all of which influence
the value of a company’s equity. The following sections of this report examine the trend
of Oracle Corporation’s balance sheets, income statements, and financial ratios over
the past five years. In addition, the Company’s financial performance is compared to the
median company in the Software and Programming industry as a means of measuring
the Company’s relative historical performance.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Balance Sheets

Presented below are the balance sheets for Oracle Corporation for the twelve month
period ending November 30, 2009 and for the fiscal years ending May 31, 2005 through
2009.

As of November 30, 2009, Oracle’s assets totaled $53,833 million, up 13.5% from the
end of FY09. Current assets totaled $25,235 million, or 46.9 percent of total assets, and
consisted primarily of cash (27.7 percent of total assets). Since the end of FY09, the cash
balance of the company increased from $8,995.0 million to $14,919.0 million or 66
percent as of November 2009.

A significant portion of Oracle’s assets are categorized as Goodwill/Intangibles. As of


3Q10, Goodwill/Intangibles accounted for 47.7 percent of total assets.

Current liabilities were $8,534.0 million as of November 30, 2009, or 15.9 percent of
total assets. Short-term debt and Other Current Liabilities were the largest current
liabilities of the company accounting for 1.9 percent and 13.5 percent of total liabilities.

Oracle is modestly leveraged, with $13,751.0 million of long-term debt at the end of
Oracle is modestly leveraged, with $13,751.0 million of long-term debt at the end
ofQ09, or approximately 25.5 percent of total liabilities and equity. Oracle’s long-term
debt increased in the past five years from $159.0 million at the end of FY05 to $13,751
million in 3Q10.

Due to consistent profitability, shareholders’ equity increased in each of the past five
years and for the twelve month period ending November 2009. Shareholders’ equity has
grown from $10,837 million at year end 2005 to $27,531.0 on November 30, 2009.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Balance Sheet
(Amounts in Millions)
TTM FYE FYE FYE FYE FYE
Assets 11/30/09 05/31/09 05/31/08 05/31/07 05/31/06 05/31/05
Cash 14,919.0 8,995.0 8,262.0 6,218.0 6,659.0 3,894.0
ST Investments 5,865.0 3,629.0 2,781.0 802.0 946.0 877.0
Accounts Receivable 3,086.0 4,985.0 5,799.0 4,589.0 3,420.0 2,900.0
Inventory 0.0 0.0 0.0 0.0 0.0 0.0
Other Current Assets 1,365.0 972.0 1,261.0 1,274.0 949.0 777.0
Total Current Assets 25,235.0 18,581.0 18,103.0 12,883.0 11,974.0 8,448.0
Net Property,Plant & Equip. 1,956.0 1,922.0 1,688.0 1,603.0 1,391.0 1,442.0
LT Investments 0.0 0.0 0.0 0.0 0.0 0.0
Goodwill/Intangibles 25,682.0 26,111.0 26,386.0 19,443.0 14,337.0 10,376.0
Other LT Assets 960.0 802.0 1,091.0 643.0 1,327.0 421.0
Total Assets 53,833.0 47,416.0 47,268.0 34,572.0 29,029.0 20,687.0
Liabilities
Accounts Payable 255.0 271.0 383.0 315.0 268.0 230.0
Short Term Debt 1,001.0 1,001.0 1,001.0 1,358.0 159.0 2,693.0
Other Current Liabilities 7,278.0 7,877.0 8,645.0 7,714.0 6,503.0 5,140.0
Total Current Liabilities 8,534.0 9,149.0 10,029.0 9,387.0 6,930.0 8,063.0
LT Debt 13,751.0 9,237.0 10,235.0 6,235.0 5,735.0 159.0
Other LT Liabilities 4,017.0 3,740.0 3,979.0 2,031.0 1,352.0 1,628.0
Total Liabilities 26,302.0 22,326.0 24,243.0 17,653.0 14,017.0 9,850.0
Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0
Common Stock Equity 27,531.0 25,090.0 23,025.0 16,919.0 15,012.0 10,837.0
Total Liabilities & Equity 53,833.0 47,416.0 47,268.0 34,572.0 29,029.0 20,687.0
Book Value Per Share 5.50 4.95 4.49 3.27 2.89 2.11

Income Statements

Presented below are the income statements for Oracle for the fiscal years 2005 through
2009 and for the twelve month period ending November 2009.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Income Statement
Amounts in Millions
TTM FYE FYE FYE FYE FYE
11/30/09 05/31/09 05/31/08 05/31/07 05/31/06 05/31/05
Sales 23,226.0 23,252.0 22,430.0 17,996.0 14,380.0 11,799.0
Cost of Goods Sold 4,394.0 4,794.0 4,981.0 4,191.0 3,235.0 2,651.0
Gross Income 18,832.0 18,458.0 17,449.0 13,805.0 11,145.0 9,148.0
Depreciation & Amortization 1,741.0 1,713.0 1,212.0 878.0 583.0 219.0
Research/Development 2,776.0 2,767.0 2,741.0 2,195.0 1,872.0 1,491.0
Interest Expense n/a n/a n/a n/a n/a n/a
Unusual Expenses/(Income) 310.0 127.0 65.0 159.0 222.0 355.0
Total Operating Expenses 14,484.0 14,931.0 14,586.0 12,022.0 9,644.0 7,777.0
Operating Income 8,742.0 8,321.0 7,844.0 5,974.0 4,736.0 4,022.0
Interest Expense - Non-Op. 680.0 630.0 394.0 343.0 169.0 135.0
Other Expenses/(Income) (87.0) (143.0) (384.0) (355.0) (243.0) (164.0)
Pretax Income 8,149.0 7,834.0 7,834.0 5,986.0 4,810.0 4,051.0
Income Taxes 2,347.0 2,241.0 2,313.0 1,712.0 1,429.0 1,165.0
Income After Taxes 5,802.0 5,593.0 5,521.0 4,274.0 3,381.0 2,886.0
Adjustments to Income 0.0 0.0 0.0 0.0 0.0 0.0
Income for Primary EPS 5,802.0 5,593.0 5,521.0 4,274.0 3,381.0 2,886.0
Nonrecurring Items 0.0 0.0 0.0 0.0 0.0 0.0
Net Income 5,802.0 5,593.0 5,521.0 4,274.0 3,381.0 2,886.0
EPS Basic 1.16 1.10 1.08 0.83 0.65 0.56
EPS Diluted 1.15 1.09 1.06 0.81 0.64 0.55

As presented, the Company reported increases in revenues in each of the past five
years, from $11,799.0 million in 2005 to $23,252.0 million in 2009. For the twelve
month period ending November 2009, Oracle shows a small decrease in revenue of
approximately 1.3 percent.

Cost of goods sold as a percentage of revenues decreased in four of the past five fiscal
years and again in the twelve month period ending November 2009. Operating expenses
ranged from 67.1 percent to 62.4 percent from FY05 to November 2009. For the twelve
month period ending November 2009, cost of goods sold was 18.9 percent of revenues,
and operating expenses were 62.4 percent of revenues.

The Company reported consistent profitability over the past five years. For the twelve
month period ending November 2009, net income was $5,802.0 million, or 25 percent
of revenues.

Comparative Ratios

The following table presents various financial and operating rations for Oracle
Corporation.

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
Comparative Ratios
TTM FYE FYE FYE FYE FYE
Profitability 11/30/09 05/31/09 05/31/08 05/31/07 05/31/06 05/31/05
Gross Profit Margin % 81.10 79.40 77.80 76.70 77.50 77.50
Industry Median 58.50 57.10 58.30 57.90 60.00 60.00

Operating Margin % 37.60 35.80 35.00 33.20 32.90 34.10


Industry Median (15.90) (10.40) (2.80) (2.40) (2.00) (2.30)

Net Profit Margin % 25.00 24.10 24.60 23.70 23.50 24.50


Industry Median (9.00) (9.80) (3.70) (3.30) (3.60) (4.60)

Return on Equity % 22.80 23.20 27.60 26.80 26.20 30.70


Industry Median 8.20 7.70 9.10 8.00 7.20 7.10

Return on Assets % 11.70 11.80 13.50 13.40 13.60 17.30


Industry Median (18.20) (18.20) (9.00) (7.00) (6.90) (7.00)

Liquidity
Quick Ratio (X) 3.00 2.00 1.80 1.40 1.70 1.00
Industry Median 1.10 1.30 1.40 1.50 1.50 1.40

Current Ratio (X) 3.00 2.00 1.80 1.40 1.70 1.00


Industry Median 1.20 1.30 1.40 1.50 1.50 1.50

Payout Ratio (X) 12.90 4.50 0.00 0.00 0.00 0.00


Industry Median 0.00 0.00 0.00 0.00 0.00 0.00

Times Interest Earned (X) 13.00 13.40 20.90 18.50 29.50 31.00
Industry Median (1.50) (2.50) (2.00) (1.30) (0.80) (1.40)

Debt Management
Total Liabilities to Total Assets % 48.90 47.10 51.30 51.10 48.30 47.60
Industry Median 54.10 54.40 51.40 47.50 48.00 49.30

Long-Term Debt to Capital % 33.30 26.90 30.80 26.90 27.60 1.40


Industry Median 0.00 0.00 0.00 0.00 0.00 0.00

Long-Term Debt to Equity % 49.90 36.80 44.50 36.90 38.20 1.50


Industry Median 0.00 0.00 0.00 0.00 0.00 0.00

Asset Management
Receivables Turnover (X) 7.10 4.30 4.30 4.50 4.60 4.50
Industry Median 5.80 5.30 5.30 5.00 5.50 5.40

Inventory Turnover (X) NA NA NA NA NA NA


Industry Median 9.30 10.70 11.10 10.50 11.20 12.60

Asset Turnover (X) 0.50 0.50 0.50 0.60 0.60 0.70


Industry Median 0.80 0.90 0.70 0.80 0.90 0.90

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© Copyright 2009 Ronald Sommer. All Rights Reserved.
 Based on its gross margin, operating margin, and net margin, ORCL converts a
larger percentage of its revenues to profits than most other companies in the
Software & Programming industry. Furthermore, the company is profitable with
an operating margin of 37.64%.
 ORCL pays an annual dividend of $0.20 and, at its current price, yields 0.80%, a
level that is in-line with the Software & Programming industry average but below
that of the S&P 500 which yields 2.35%. Additionally, this company is in the
minority as few others in this industry pay a dividend.
 ORCL grew earnings in the face of decreased revenues over the past twelve
months. This is a trend that is not sustainable if profits are to continue to grow at
this rate. However, this result was better than that of the average company in
the Software & Programming industry where earnings fell over the period.
 ORCL is very efficient in comparison to its peers with a Return on Assets, Return
on Equity, and Revenues Per Employee of 11.76%, 23.05%, and $270,069.80
respectively. In particular the company is among the best at managing their
owner's equity and at managing their resources, and is above average at
generating revenues from employees compared to other companies in the
Software & Programming industry.
 ORCL's debt to total capital ratio, at 34.58%, is in-line with the Software &
Programming industry's norm despite its increase over the last year. With an
Interest Coverage ratio of 12.38 and a Quick ratio of 2.96, both of which are in
the industry's strongest quintile, the company should be able to easily repay
debt.

Valuation Conclusion

In placing a target price of $37.79, we place a P/E of 22X on the average FY11 earnings
estimates. This is consistent with Oracle’s long-term average multiple and is justified by
the Company’s consistent history of churning out profits.

Disclosure: Author is long ORCL.

Please visit http://measuredapproach.wordpress.com for important disclosures.


© Copyright 2009 Ronald Sommer. All Rights Reserved.

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