Fears Of A New Financial Crisis Make Oracle A Fantastic Buy

Sep.22.11 | About: Oracle Corporation (ORCL)

As the financial markets are engulfed with mass hysteria over the debt situation in Europe and fears of a double-dip recession in the US, stock market correlation has reached record highs. It seems that all stocks are trading either higher or lower, regardless of their financial performance or macro-economic sensitivity. We would like to highlight one stock that has been caught up in the panic selling of late, and that stock is Oracle (NASDAQ:ORCL).

Oracle is a multinational technology firm that has weathered the market turmoil quite well. Over the last quarter, as market hysteria grew, Oracle produced great results. New software licenses, a gauge of future revenue, grew 17%. Hardware gross margins rose to 54%, as the company gave up sales in exchange for profitability, something we think is a prudent move. On the company's last earnings call, Safra Catz, Oracle's President and CFO, noted that there is a lot of Company specific (pdf) momentum that has allowed Oracle to thrive. Oracle's GAAP EPS grew 36% year-over-year to 36 cents/share and its non-GAAP EPS grew 14% to 48 cents/share.

Oracle's management was confident on the conference call, and the new SPARC server line will allow Oracle to continue to gain market share. Oracle also issued good guidance, and expects this quarter to be even better. While hardware revenue will be flat to down 5%, the division as a whole will be more profitable because of the shift to higher margin products. GAAP revenue is expected to grow 5%, and GAAP EPS is expected to be between 44 and 46 cents a share, resulting in quarter-over-quarter growth of 22-27%. In addition, the hiring of 350 salespeople in the most recent quarter shows that Oracle is putting its money where its mouth is, that it sees real opportunities for its products. A company not confident in its business prospects would not be hiring salespeople.

Oracle's financial strength just keeps rising. Free cash flow reached a record $12.3 billion in the last 4 quarters, and Oracle has over $17 billion in net cash, or $3.30/share. Oracle has indicated that it will deploy its cash aggressively, ranging from share buybacks to acquisitions, to dividends. Oracle does not hoard its cash, but it generates so much of it that it has a comfortable cushion of safety. Oracle pays a quarterly dividend of 6 cents/share (0.8% yield), and we think the dividend has much farther to rise.

In short, we think Oracle is a supremely undervalued company. It has delivered superb operating performance quarter after quarter. Management has consistently shown that they are able to see a set of goals and do whatever is necessary to achieve them. The stock price does not reflect this. Over the past year, Oracle has risen by less than 4%, which is still better than the S&P 500 (NYSEARCA:SPY).

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Oracle's best days are ahead of it. It is a large, stable firm with a diverse customer base that is going to grow at a steady clip for the foreseeable future. Oracle's management is confident in the company's continued success, and so are we. Analysts are also confident. S&P rates Oracle a Strong Buy, and has a price target of $40, representing upside of over 25%. Argus sees the stock reaching $39, and the Reuters average price target is $35.77. And Credit Suisse sees the stock reaching $42, and notes that Oracle is its top pick. Oracle is a great company selling at a depressed stock price, something that we feel will not last. Now is a great time to add to or initiate a position in a leading tech company that has weathered the market turmoil quite well and should continue to do so.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ORCL over the next 72 hours.