Oracle Shares Are On Sale: Could Be A Great Stocking Stuffer

Dec.23.11 | About: Oracle Corporation (ORCL)

Oracle (NASDAQ:ORCL) handed investors a lump of coal for a Christmas stocking stuffer on Tuesday. The company reported Q2 earnings that missed expectations and gave rather conservative guidance into the future. Investors sold the stock en masse, giving shares a new $25-$26 price.

Click to enlarge

Earnings per share (non-GAAP) came in at $0.54, $0.03 below expectations. New license revenue, a measure of software sales, increased only 2%. The company had guided earlier an increase of 6%-16%. Hardware sales disappointed as well, falling 14%. Although a decline was expected, the report was worse than expected.

Oracle had some headwinds in the quarter. The company was facing some tough year over year comparisons, exchange rates were unfavorable, and some customers were delaying purchases. "This quarter was not as we thought it would be", said CFO and Co-President Safra Catz. According to Ms. Catz, the company also saw some "additional approvals required" for previously expected deals.

The good news is that Oracle has pared back its guidance and reset investor expectations. In fact, some of the delayed hardware purchases may be due to some customers wanting to get in on Oracle's newer technology expected to be released soon and could deliver in the next quarter. In addition, margins continue to improve and Oracle's order pipeline is very strong.

Oracle is seeing strong demand for its Exadata and Exalogic servers. The company reported that it sold 200 Exadata and Exalogic engineered systems in the second quarter. Oracle expects to sell 300 systems in the third quarter and 400 systems in the fourth quarter. Though strong, this seems to be slightly lowered guidance from previous expectations.

Shares of Oracle are cheap and may be oversold at this point. The company has an excellent balance sheet, strong cash flow, a strong management team, and pays a dividend. Oracle now trades at just over 14 times earnings and less than 11 times forward earnings. This is before taking into account Oracle's $6.15 per share of cash. Oracle trades at an EV/EBITDA of 7.4 and a price-to-sales ratio of 3.64. Oracle's price-to-earnings growth (NYSE:PEG) ratio is 0.88.

Click to enlarge

This quarter was a rare miss for a company that doesn't disappoint very often. In fact, each time Oracle has disappointed in the past it's been a buying opportunity for investors. Oracle has given investors a total return (capital gains + reinvested dividends) of 73% over the last three years.

Even if you reduce Oracle's expected 2012 earnings by 10%, the stock is trading at just over 12 times expected earnings. Shares have already priced in Oracle's conservative guidance. As long as the world economy continues to muddle along, Oracle should benefit with higher sales and increased margins. With a low debt level and $31 billion in cash, Oracle can weather just about any economy.

Even though Oracle handed investors a lump of coal, they may want to consider stuffing their stockings with Oracle's stock.

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