- We pit two companies from the technology sector, Oracle and SAP, against one another in the latest installment of our Head-To-Head series.
- The article focuses on the relative strengths and weaknesses of Oracle and SAP based on business performance and sustainability/dividends/forecasts.
- It ends with discussion of the current valuations of the two companies, and details whether Oracle represents good relative value at current price levels.
Oracle (NYSE:ORCL) was founded in 1977 and is headquartered in Redwood City, California. It develops, manufactures, markets, hosts, and supports database and middleware software, application software, cloud infrastructure, hardware systems, and related services worldwide. It provides software and hardware systems, and related services to manage cloud-based or on-premise IT environments, as well as to deploy cloud software-as-a-service, platform-as-a-service, and infrastructure-as-a-service. The company offers software for mobile computing; database and middleware software that runs and manages business applications for midsize businesses and large enterprises; and Java, a software development language. It also provides applications software, such as human capital and talent management, customer experience and customer relationship management, financial management and governance, risk and compliance, procurement, project portfolio management and supply chain management to businesses across the globe.
Team Money Research Rating
Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably and that pay a decent, well-covered dividend.
We analyze each company relative to the other on the following criteria within each of our two main buckets:
- Return on equity
- Return on assets
- Operating margins
- Quarterly revenue growth
- Quarterly earnings growth
- Debt to equity ratio
- Interest cover
- Dividend payout ratio
- Forward yield
- Annual EPS growth forecast
Once we have analyzed the two companies based on the first two buckets, we can then assess whether they represent good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.
- Forward price to earnings ratio
- Price to book value ratio
- Enterprise value to EBITDA
- Price to 3 year average free cash flow ratio
- 5 year price to earnings growth ratio
So, for example, a company that performs well compared to its rival on the first two buckets (business performance and sustainability/dividends/forecasts) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.
Return on equity
Return on assets
Quarterly rev. growth
Quarterly EPS growth
Debt to equity ratio
Dividend payout ratio
Forward dividend yield
Annual EPS growth forecast
As you can see, the performance of Oracle and SAP in the first two buckets is broadly similar. Indeed, profitability is very similar between the two companies, with Oracle edging out SAP in terms of return on equity and operating margins, but being slightly behind in terms of return on assets. However, the difference here is only minor (10.88% versus 11.02% for SAP), so we would conclude that Oracle's performance in terms of profitability is slightly better than that of SAP, owing to its better return on equity and operating margins.
In addition, while Oracle's quarterly revenue growth is superior to that of SAP (3.4% versus 2.7%) its bottom-line slipped last quarter by 4.20%. While disappointing, Oracle can look ahead to improved numbers going forward, as highlighted by the annual EPS forecast showing a rise of 8.86%. While below SAP's forecast growth rate of 9.54%, this remains very impressive.
Meanwhile, both companies do not utilize a large amount of balance sheet leverage and interest cover shows that both companies are unlikely to be hit too hard by rising interest rates. Indeed, interest cover of 20+ for both companies is highly impressive. In addition, it is very close in terms of dividends, with both Oracle and SAP having the potential to increase payout ratios significantly so as to improve upon their below average yields.
Overall, a very close result for the first two buckets that we feel does not yield a clear winner.
Due to their largely equal performance in the first two buckets, we feel that Oracle and SAP should trade on similar valuation multiples. Let's see if they do.
Forward price to earnings ratio
Price to book ratio
Price to free cash flow ratio
We're surprised to see that Oracle trades at a substantial discount to SAP on all five valuation criteria. That's because the two companies were very evenly matched after the first two buckets. However, Oracle's discount of 45.7% on the forward P/E, discount of 19.5% on the EV/EBITDA ratio and discount of 31.8% on the price to free cash flow ratio in particular highlight just how much better value Oracle is right now when compared to its sector peer. As such, we feel the current valuation gap is too wide and could narrow in future, meaning that Oracle could outperform SAP going forward.
Oracle is a high quality company that posted impressive scores on The Team Money Research Rating System. Indeed, its scores were neck and neck with sector peer, SAP, although the valuation bucket highlighted that Oracle appears to offer far better value for money at current price levels. As a result, we believe that it could outperform SAP going forward.
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