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Strategies & Market Trends : Value Investing

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To: Paul Senior who wrote (46025)12/21/2011 11:53:32 PM
From: AsymmetricRead Replies (1) of 54194
 
Oracle Is Oozing Value

By TERESA RIVAS / Barrons / Dec 21, 2011


Though the business software giant's stock plunged to near a 52-week low on weak earnings and a tepid forecast, we spy a buying opportunity.

Investors are fleeing Oracle, as they foresee little growth following a disappointing quarter and weak guidance.

After Tuesday's market close, Oracle (ticker: ORCL) reported fiscal second-quarter earnings of $2.19 billion, or 43 cents a share, up from 37 cents a share a year earlier. Excluding one-time items, adjusted earnings per share rose to 54 cents from 51 cents, below the 57 cents analysts were expecting. Revenue grew 2% to $8.8 billion, below expectations of $9.2 billion. Projected revenue growth of $8.9 billion to $9.25 billion was also below the consensus of $9.46 billion.

Shares of Oracle were down 13.3% to $25.30 on the news, close to their 52-week low of $24.72.

The quarter, which ended Nov. 30, was not pretty, and guidance shows that Oracle has a difficult road ahead; however, trading at less than 10 times forward earnings, it's a cheap bet that the worst is over.

The bad news "will effectively de-risk Oracle shares going forward," writes Nomura analyst Rick Sherlund, who reduced his target price from $34 to $32.

While there was some good news in the quarter--including acceleration of Exadata and Exalogic, expanding margins, a strong pipeline of products and growing sales capacity--it was eclipsed by a macroeconomic-induced slowdown of corporate tech buying, as well as currency headwinds and poor execution.

A slowdown in information-technology spending is of course beyond Oracle's control, but it has been taking steps to streamline its internal processes to avoid a repeat of the problems that plagued this most recent quarter.

Moreover, if a modest pullback in tech spending is the main bugaboo, Oracle may suffer, but smaller competitors will pay the real price: "The software industry is a game of scale, meaning that the largest vendors can develop new products at lower cost per customer due to their large global customer bases and…like most other industries [it] will consolidate as it matures, as thousands of global software vendors are acquired or go out of business to form a "big three" industry structure that is dominated by a small number of very large vendors," writes Piper Jaffray analyst Mark Murphy.

Even if its plan to transform into a one-stop hardware and software shop for companies has been choppier than hoped, a spending slowdown would likely hamper rivals more severely, allowing for increased market share and even inexpensive acquisitions.

While Oracle certainly has some soul-searching to do, it simply appears too cheap, especially with its 0.8% yield, double-digit margins, and a 25% return on equity. ThinkEquity analyst Brian Schwartz finds the stock attractive at its current level, "a similar trough valuation multiple Oracle experienced in March 2009, even though the present business is 60%+ larger and more profitable."

Ultimately, the next couple of quarters will likely be challenging for Oracle, as it overcomes concerns related to this shortfall and deals with the ever-changing economic landscape and its effect on corporate IT budgets.

Yet it seems hard to turn down such a cheap bet on a best-in-class name with attractive defensive attributes, especially as its longer-term prospects appear intact.
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