Oracle's Efficient Investment Spending Supports Future Growth

Aug.13.14 | About: Oracle Corporation (ORCL)

Summary

Forecasted 50% increase in IT spending.

Strong fundamentals indicate attractive valuation.

Efficient investment spending supports growth.

Oracle (NYSE:ORCL) over the past 10 years has outperformed its industry and major indices (Exhibit 1). However, prices have underperformed the S&P and NASDAQ for the past few years. Consistent growth in IT spending has benefited shareholders and, according to their own study, IT spending is expected to increase over 50% for the next two years.

Exhibit 1 -

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Source: Stock Rover

Fundamentals

Company fundamentals are solid on a historical basis. Operating margins and free cash flows are near the highest levels in 10 years (Exhibit 2 and 3). Additionally, the company continues to add value through an annualized increase in research spending of 16% which has contributed to an increase in sales of 15% and EPS growth of 16% (Exhibit 4). Moreover, ORCL maintains consistent efficiency metrics as it continues to grow through acquisitions, such as the recent announcement to acquire Micros Systems (Exhibit 5).

Exhibit 2 -

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Source: Stock Rover

Exhibit 3 -

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Source: Stock Rover

Exhibit 4 -

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Source: Stock Rover

Exhibit 5 -

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Source: Stock Rover

Valuation

Industry Analysts have an average target price of $44.59 (Exhibit 6). Also, price to earnings is at historically low levels while price to sales is near its average (Exhibit 7).

Exhibit 6 -

Exhibit 7 -

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Source: Stock Rover

Using a discounted cash flow analysis supported by comparable multiples valuation puts the estimated equity value per share at $45.46 or 14% above current prices. Additionally in respect to its industry, ORCL is undervalued according to EV/EBITDA and P/E while accurately priced according to P/S.

Technicals in Brief

Oracle's equity price has pulled back from recent highs set in June and is resting a moderate support. More significant support lies at 37 and will be a target low considering current conditions.

Investment Opinion

ORCL, along with others in this industry, will have challenges continuing the strong growth patterns experienced over the past decade. Additionally, signs of weakening global economic conditions could stifle investments in technology as corporations cut back. However, demand projections continue to support current prices and signal attractive potential returns to investors. Moreover, Oracle continues to invest in its operations to produce organic growth as well as growth through acquisition, a business model for which management has become exceedingly efficient. An investment in shares within the range of 37 to 40 is an acceptable decision to position a portfolio for future growth.

Disclaimer: Michael Lee is an investment strategist at Long Street Capital Management, LLC ("LSCM"). This article is prepared by Mr. Lee as an outside business activity. As such, LSCM does not review or approve materials presented herein. The opinions and any recommendations expressed in this article are those of the author and do not reflect the opinions or recommendations of LSCM

None of the information or opinions expressed in this article constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either LSCM or Mr. Lee may hold or control long or short positions in the securities or instruments mentioned.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in ORCL over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.