Oracle Earnings Preview: Stock Fairly Valued; Dividend Could Double

| About: Oracle Corporation (ORCL)


Without a change in revenue growth, stock looks fairly valued.

Larry Ellison in my opinion is one of premier CEO's in technology.

Dividend could double over next few years.

Oracle (NASDAQ:ORCL), the enterprise database and now hardware provider, reports their fiscal q3 '14 financial results after the bell on Tuesday, March 18th, 2014.

Analyst consensus is looking for $0.70 in earnings per share (EPS) on $9.36 billion in revenue for expected year-over-year growth of 8% and 4% respectively.

IF ORCL meets the 4% revenue growth expectation, it will be the best y/y revenue growth for the software giant since mid-2011.

ORCL guided to License growth in fiscal '14 to between 2% and 12%.

ORCL guided fiscal q3 '14 to between $9.33 - $9.35 billion and to $0.70 per share. The current consensus then is expecting a little better revenue growth and no change in EPS.

It doesn't take much to summarize ORCL's business over the last few years:

1.) Hardware has been one of the biggest drags on ORCL's results as the Sun Micro acquisition, although important longer-term, has seen steady revenue erosion the last 3 years. Hardware growth was better last quarter, +5% in constant currency, versus the double-digit declines of the last 2 years. Hardware is about 7% - 10% of ORCL's revenues. The big driver last quarter was Exadata sales and revenue growth;

2.) The lion's share of revenues for ORCL remains software and services. New application license growth was just 1% - 2% (organic) in fiscal q2 '14. The database revenue continues to grow mid-single-digits, with total license update and the support revenues representing roughly half of ORCL's revenues.

ORCL has just completed what I would call a longer term dry spell where the software giant has seen revenue growth between low negative single digits and mid positive single digits since mid-2011.

However one of ORCL's real strengths (and we've followed the company since the mid to late 1990s) is that Larry Ellison has never failed to morph the software giant into emerging technologies and reposition the company into emerging growth areas of tech. I thought Larry's hiring of Chuck Phillips, Morgan Stanley's first-rate software analyst from the late 1990's, and making him CEO and letting him acquire and bolt-on these emerging software companies to drive ORCL's growth in what was a horrific contraction in enterprise tech spending after 2000 and 2001, was just a brilliant move, and kept ORCL from suffering the fate of other large-cap tech companies in the last 10 years where growth went from hyper to non-existent in the blink of an eye.

Whether Chuck was behind the Sun Micro acquisition, I don't know, but that acquisition allowed ORCL to control their installed base since most of ORCL's dbase software ran on Unix and Sparc machines, and even though the business seems to be bleeding off, the rise of data servers and the growth in the Cloud could help this business over the longer-term.

Speaking of the Cloud, like a lot of large software companies today, the Cloud is a focus of ORCL's management team which represents about 3% of ORCL's revenues currently.

Some are skeptical of ORCL's Cloud offering relative to SaaS and other Cloud vendors like SAP (NYSE:SAP), (NYSE:CRM), etc., etc. and to be frank, I am not a "techie" so to speak, and can't differentiate between technology vendors at all, thus I look to the numbers and numbers only to tell me if a management team can or is executing in a particular space.

Valuation: in terms of ORCL's valuation forward EPS and revenue estimates for fiscal '14, '15 and '16 for 3% - 5% revenue growth out of the database giant, and 8% - 10% earnings growth, for the next 3 years.

The stock has had a nice move since the last earnings report from $33 to $39 per share and is trading at 13(x) the 2014 EPS estimate and 12(x) the 2015 consensus EPS estimate for expected 9% and 9% respectively.

Looking at cash-flow ORCL is trading at 8(x) 4-quarter trailing cash-from operations (ex-cash) and 10(x) free-cash-flow ex cash, which is at the higher end of where we would like to buy the stock.

Intrinsic value: both ours and Morningstar's intrinsic value models put an estimated intrinsic value model on ORCL of $38 - $40 per share. With the stock trading at $38 per share, there is little discount to intrinsic value for new investors.

Technically the stock is overbought, and we would wait until the mid $30's to add to the name. The 200 day moving average is right around $34 per share.

One change to ORCL in the last few years is the dividend initiation, which is slated to be increased again, and the continued share buyback. ORCL has a dividend yield of about 1.8% but the payout ratio is remains under 20%. The current $0.48 dividend is scheduled to be increased (it could have been already) but if ORCL were to indicate to the market that they were a mature business and wanted to boost the dividend payout ratio to roughly 33% - 35% where most of the SP 500 is already, the dividend could have room to double to $0.90 - $1.05 per share and the payout would still be just 33% of EPS.

Granted software businesses can change rapidly due to innovation, but the point is ORCL dividend has plenty of upside for income-oriented and patient investors, if the dividend continues to get boosted.

Since late 2010, when ORCL's fully diluted share count peaked at 5.117 billion, ORCL has repo'ed over 500 ml shares as of late quarter and reduced fully diluted share outstanding 10% to 4.6 billion as of November, 2013.

ORCL is returning all of its free-cash-flow to shareholders currently.

We like the company and the business, but want to see the shares lower, before adding to positions. Frankly I think MSFT is just starting to do now, what Ellison and Oracle have been doing for the past 13 years. Safra Catz and Mark Hurd will work to keep ORCL growing, and sustaining some of the best margins in enterprise software.

Disclosure: I am long ORCL, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.