ModernGraham Quarterly Valuation Of Oracle Corporation - March 2014

| About: Oracle Corporation (ORCL)

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method, one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Oracle Corporation (NASDAQ:ORCL) fares in the ModernGraham valuation model.

ORCL Chart

ORCL data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - PASS
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $37.50
MG Value $85.39
MG Opinion Undervalued
Value Based on 3% Growth $32.16
Value Based on 0% Growth $18.85
Market Implied Growth Rate 4.20%
Net Current Asset Value (NCAV) $0.57
PEmg 16.91
Current Ratio 3.39
PB Ratio 3.76

Balance Sheet - 2/28/2014

Current Assets $44,404,000,000
Current Liabilities $13,092,000,000
Total Debt $22,677,000,000
Total Assets $86,562,000,000
Intangible Assets $35,880,000,000
Total Liabilities $41,855,000,000
Outstanding Shares 4,483,000,000

Earnings Per Share

2014 (estimate) $2.76
2013 $2.26
2012 $1.96
2011 $1.67
2010 $1.21
2009 $1.09
2008 $1.06
2007 $0.81
2006 $0.64
2005 $0.55
2004 $0.50

Earnings Per Share - ModernGraham

2014 (estimate) $2.22
2013 $1.84
2012 $1.56
2011 $1.29
2010 $1.06
2009 $0.93

Dividend History

ORCL Dividend Chart

ORCL Dividend data by YCharts


Oracle Corp. is a great looking company, especially for the Enterprising Investor, as the company passes all of the requirements of that investor type. The Defensive Investor is not as interested presently due to the lack of a long enough dividend history and the high PB ratio. As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research into the company as well as other opportunities, including a review of ModernGraham's valuation of Hewlett-Packard Company (NYSE:HPQ) and ModernGraham's valuation of International Business Machines (NYSE:IBM).

From a valuation standpoint, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.06 in 2010 to an estimated $2.22 for 2014. This demonstrated level of growth outpaces the market's implied estimate of 4.2% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Oracle Corporation? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Oracle Corporation (ORCL) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.