Seeking Alpha
Value, growth at reasonable price, long/short equity, event-driven
Profile| Send Message| ()  

As of December 20th, Oracle Corporation (ORCL) has announced the $1.5 billion acquisition of Responsys (MKTG). The intent is to pair it with Eloqua, a similar cloud-based marketing company purchased last year. It is reasonable to posit that Oracle's efforts to increase marketing automation share can increase its revenue base. Pursuant to the announcement, and a decent earnings report days prior to it, the stock has since risen to its 52-week high, which is technically a time to look for a pullback of at least 5%.

A new article released by thestreet.com informatively summarizes background strategy and makes a sensible point that competition is intensifying with Salesforce.com (CRM) and Adobe Systems Incorporated (ADBE). It does not toss around the term industry consolidation; though it would be relevant to Oracle's future margins. There is also a technical observation that the stock, up 26% since July, "Might be ready for a slight cool down."

In the context of revenue percentages, if the acquisition proceeds smoothly, it should increase the amount the company gets from cloud and software licensing, which is currently close to 20%. This may be healthy for several reasons - perhaps including the fact that 40 to 50% is currently attributed to software support. Further, Hardware products sales have been in decline and Hardware Support is anemic (Source 10-Q, UBS).

In an article two weeks ago, pursuant to an optionMONSTER report of a large trade surrounding an Open Source competitor, Red Hat, Inc. (RHT), summary information reviewed did not give cause to conclude that the stock would rise substantially upon reporting earnings. Evidently, professionals have profited from knowing better. Red Hat, after beating on top and bottom lines and raising guidance, appreciated approximately 14%.

There is now a somewhat similar situation as another large bet has been made: 3,000 February puts at a $38 strike price bought for $1 each, anticipating that ORCL will give back some of its recent gains in the near term. As there is no indication of a corresponding put sale, the trader seems to foresee the stock price headed substantially lower than $37. Even without any catalyst, a modest pullback would result in a price of $36.36. The stock has closed at $38.27.

Getting back to the underlying business, Oracle is a mega cap tech company, and constituent of the S&P 500. It pays a small dividend and buys back a lot of stock, having borrowed inexpensively in support of its program. Despite repeated selloffs after multiple disappointing quarters during calendar 2013, substantial money spent on share repurchases appears to have been well-timed. Its Form 10-Q for the period ended 11/30/13 shows 176.1 million shares repurchased for $5.8 billion ($32.94 / share) during previous six months; and 200.3 million for $6.1 billion ($30.45 / share) during the six months ended 11/30/12.

The company has been recognized for rewarding shareholders through stock buybacks. According to information compiled by FactSet (FDS), as of December ORCL is in the Top 10 in terms of dollars spent over a year having utilized $10.9B (trailing AAPL, XOM, T, PFE, & IBM) to retire 5.4% of shares.

Also, the company's valuation is reasonable in consideration of several metrics, a topic discussed in greater detail later. There is $8.3 billion remaining in the repurchase program according to the filing referenced above and it may sensibly be utilized. Here are two charts comparing share count data amongst tech mega caps over five years, and using year to date figures, respectively:

(click to enlarge)(click to enlarge)

International Business Machines (IBM) is probably a closer peer than Microsoft (MSFT). IBM's 17.6% reduction in outstanding equity over five years is most shareholder-friendly. In the past year, Oracle has led the pack in retiring 4.51% as of 2Q 2014 as shown immediately above.

In terms of valuation, ORCL's EV / EBITDA multiple is identical to IBM's; it is cheaper on a EV / FCF, and pricier than IBM on P / E. Hewlett-Packard (HPQ) is included, though its hardware business and consumer products can probably be attributed to its remarkable discount on each metric.

(click to enlarge)(click to enlarge)(click to enlarge)

In a December 18th report entitled "Delivered stocking stuffers; waiting for the big present," UBS reiterates a Buy rating on ORCL and raises its 12 month price target to $39 from $37. The Swiss firm's target is based on a relatively low 11.7x P / E multiple, in consideration of past valuations. It estimates EPS of $2.91 in 2014, $3.17 in 2015, and $3.46 in 2016. This seems to be cogent and sensible.

There are further metrics that can be viewed. UBS tends to produce quality research. While ROE and P/B value are forecast to decline, revenue and earnings growth are also predicted:

Oracle has a strong balance sheet and is projected to be sitting upon a $16.7 billion pile of cash. Standard & Poor's rates its credit A+ (stable outlook). Further, the stock is widely covered and analysts recommend it. Based on 35 opinions, it is attractively valued, trading at just over 12x 2014E earnings with a 10.78% five year growth rate.

Particularly in consideration of the imminent and short term nature of the big options trade, it is not obvious what event, if any, could be a downside catalyst. The company is not expected to announce earnings until March 19th. Reponsys shares currently trade at $27.41, a premium to the $27 offer, perhaps suggesting that the market anticipates an increased bid though the Board of Directors approves it.

Further, there are risks to frequent acquisitions, their integrations, and margin pressures that can manifest over the long term. In its reports, UBS includes a statement of risks that partially reiterates Oracle's own Risk Factors. Given what has been discussed about Oracle's acquisitions, I am modifying the presentation into a checklist for near-term considerations:

_√_ Oracle makes frequent and large acquisitions

_√_ Integration of acquisitions

_√_ Potential margin pressure after acquisitions

____Maintenance revenue growth is under pressure

____Pressure on license revenue as customers hesitate to commit to big projects

____Maturing database market

____Emerging competitors, including in virtualization, on-demand Cloud computing, and open source

____High debt load

_√_ CEO succession plan

Apart from the buyouts, another possibility is that the trader foresees a competitive threat emerging. Also, anyone familiar with Oracle knows that the company is the product of Larry Ellison, a remarkable entrepreneur and one of the world's richest men. If something were to happen to him, the result would almost certainly be a difficult situation.

Oracle's President is Mark Hurd. Prior to departure amidst a scandal allegation at Hewlett-Packard, his time has only led to the company's widely recognized difficulties (it has been turning around, after follow-up CEO Apotheker - despite an $8.8 billion write down pursuant to its Autonomy acquisition). Hurd unloads copious amounts of ORCL stock, a company that boasts no insider buying. However, his use of LinkedIn (LNKD) as a communication medium may appeal to potential employees, as well as stockholders. Remarkably, since his first blog there on September 5th, 2013, ORCL is up 18.4% and has paid a $0.12 dividend. Anyhow, it would make sense that designation of a successor for Ellison could help the share price, as the lack of one is a risk.

To summarize, Oracle is a big, shareholder-friendly company. Its financial condition is sound. Those who like it sensibly invest therein. While it generally is not a good idea to buy a stock at its 52 week high, looking for a pullback, and betting on one, are separate questions.

Source: Is Oracle Cooling Down, Or Is A Catalyst Needed?

Additional disclosure: I may initiate a long position in HPQ over the next 72 hours.