Oracle: A Good Buy Considering Its Strong History Of Returns And Growth

Mar.27.12 | About: Oracle Corporation (ORCL)

Oracle (NYSE:ORCL) has no doubt struggled over the past year. One of the big events was its 2Q12 earnings report, in the quarter ended in November 2011. Oracle had a rare earnings miss, with EPS coming in 3 cents short of the consensus estimate, which sent the stock lower nearly 12%. However, it seems like the company got back on track in its February quarter, sort of, beating estimates by 6 cents. Software revenues continued their strong run, growing 8% y/y. However, hardware revenues continued to struggle as they fell 11% y/y.

Now may be the right time to enter Oracle as Street analysts are pretty bearish on the stock, a very differing story than the trailing valuation metrics and forward valuation metrics suggest. As numerous investors have said, growth is a concern for Oracle but the valuations now assume that the current rate of growth is where Oracle will be for years to come. That may or may not come true, but with Oracle's history, I would be on the latter. Below is an in depth look at the valuation metrics and stock chart.

Valuation: Oracle's trailing 5 year valuation metrics suggest that the stock is undervalued as all of the metrics are below their respective 5 year averages. Oracle's current P/B ratio is 3.3 and it has averaged 4.3 over the past 5 years with a high of 5.9 and low of 3.4. Oracle's current P/S ratio is 3.9 and it has averaged 4.5 over the past 5 years with a high of 5.5 and low of 3.3. Oracle's current P/E ratio is 15.3 and it has averaged 19.3 over the past 5 years with a high of 24.1 and low of 14.

Price Target: The consensus price target for the analysts who follow Oracle is $34. That is upside of 16% from today's stock price of $29.16 and suggests that the stock is fairly valued at these levels. This also suggests that the stock has limited upside and should be avoided at its current stock price.

Forward Valuation: Oracle is currently trading at about $29 a share with analysts expecting EPS of $2.63 next year, an earnings increase of 9% y/y, for a forward P/E ratio of 11.1. Taking a look at the company's publically traded comparisons will give us a better idea of the stock's relative valuation. SAP is currently trading at about $71 a share with analysts expecting EPS of $3.55 next year, an earnings increase of 13% y/y, for a forward P/E ratio of 20.1.

Microsoft (NASDAQ:MSFT) is currently trading at about $33 a share with analysts expecting EPS of $3.01 next year, an earnings increase of 12% y/y, for a forward P/E ratio of 10.8. Dell (NASDAQ:DELL) is currently trading at about $17 a share with analysts expecting EPS of $2.18 next year, an earnings increase of 2% y/y, for a forward P/E ratio of 7.7. The mean forward P/E of Oracle's competitors is 12.9 which suggests that Oracle is undervalued relative to its publically traded competitors.

Earnings Estimates: Oracle has beat EPS estimates 3 times in the past 4 quarters. The company's EPS figures have come in between -3 cents and 6 cents from consensus estimates or about -5.3% to 10.7% from analyst estimates. The company has reported earnings that have differed from analyst estimates by a small margin which suggests that upside from earnings announcements may be limited. However, if the company misses estimates, then that may serve as a big negative catalyst as seen in the November quarter.

Price Action: Oracle is down 11.2% over the past year, underperforming the S&P 500, which is up 10.1%. Looking at the technicals, the stock is currently above its 50 day moving average, which sits at $29.03 and below its 200 day moving average, which sits at $29.62.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.