Oracle: MySQL And New Servers Will Reward Investors This Year

Apr.12.12 | About: Oracle Corporation (ORCL)

Application software company Oracle (ORCL) has been on a roll lately. It recently introduced a new line of Sun x86 servers. Compared to previous models, the new servers will deliver as much as 87% better performance, have increased memory and offer greater network bandwidth, allowing users to work faster and run more programs in the same footprint. The new servers will also improve upon Oracle's established reliability. In fact, the performance of the new servers has broken records. The company also introduced Netra x86 servers that are as much as 2.5 times faster than previous generations.

In addition to ramping up its product portfolio, Oracle has also upped the ante in software as well. Its popular open source database MySQL just launched MySQL 5.6 DMR. It is designed to improve replication and provide monitoring and switchover services with such stability that it will eliminate the need for third-party services, whether they are for handling High-Availability or protecting web or cloud-based services.

In a nutshell, with MySQL 5.6 and its new servers, Oracle is moving to become a one-stop shop and improving its aptitude for web-based, cloud-based and high-volume clients - a smart move given the current trend toward web-based and cloud-based services. Further, given Oracle's already well-established role in the professional world, offering a one-stop shop will be sure to make even high-volume clients happy.

Oracle is a strong position despite the obvious investments it must have made to launch these new products. The company is currently trading at $28 a share with a mean one-year target estimate of $33.93. Add this to its 24 cents dividend (0.80% yield) and investors buying in today are predicted to earn a return over 22% in the next year. To its credit, Oracle has enjoyed stronger than average revenue growth, increasing its revenues by 3.1% versus 1.3% for its industry. The increase can be seen in its earnings per share, which rose from $1.20 to finish the year at $1.67. This year, analysts estimate that the company's earnings per share will reach $2.42 a share.

Oracle also has a strong quick ratio of almost 3, indicating that covering short term cash needs should not be a problem. Compared to its peers, the company is priced low as well. Oracle is priced at just 11.24 times its forward earnings versus its peers' 20.99. The company also comes in at a discount relative to its book value (3.43 vs its peers' 6.04) and cash flow (10.99 vs its peers' 16.07). Given the company's low pricing and strong outlook, I recommend Oracle as a buy.

Rival SAP AG (SAP) recently traded for $65 a share on a one-year target estimate of $51. The company pays a 61 cents dividend (0.90% yield). Like Oracle, SAP has recently enjoyed strong revenue growth, increasing its revenue by 5.2% compared to the same quarter last year. This can easily be seen in the company's EPS, which went from 45 cents at the end of the fourth quarter 2010 to $1.22 a share at the end of the fourth quarter 2011. However, SAP is priced high compared to Oracle. At its current trade, the company is priced at 19.28 times its forward earnings, which is only marginally less than the average for its industry and a fair bit higher than that of Oracle. SAP also has a higher price to book value ratio (4.86) and price to cash flow ratio (16.36) than Oracle.

Competitor IBM (IBM) recently traded at $203 a share with a one-year target estimate of $207.35. In addition to the modest upside, the company offers a $3 dividend (1.50% yield). At these numbers, an investor buying in today would realize a return of less than 4% over the next year. IBM hasn't had nearly the revenue growth that Oracle and SAP has enjoyed - its earnings grew by just 1.6% - but it was able to increase its earnings per share by 10.5% compared to the same quarter last year ($4.18 vs $4.62). In turn, this meant that the company able to deliver an earnings per share of $13.12 for 2011 compared to $11.58 for 2010. IBM is priced lower than SAP but more than Oracle, at 12.43 times its forward earnings. Its price to book ratio is at a premium of 11.87. The company has a high price to cash flow ratio at 12.04.

Competitor CA Technologies (CA) is not positioned any better. It recently traded at $26.50 a share on a mean one-year target estimate of $28.11. While the company does pay a $1.00 dividend (3.70% yield), this makes for projected one-year return of less than 10%. CA has strong revenue growth at 10.4%, which trickled through to elevate its quarterly earnings per share by over 42%, increasing its bottom line from $1.44 at the end of 2010 to $1.61 at the end of 2011. The company is priced fairly low - it has a forward price to earnings ratio of 10.82, a price to book ratio of 2.28 and a price to cash flow ratio of 9.91 - but just now quite low enough.

Rival Microsoft (MSFT) recently traded at $30 a share on a mean one-year target estimate of $33.69, representing an estimated upside of 12%. In addition, the company also pays an 80 cents dividend (2.50% yield), making for a predicted return over the next year of roughly 14.5%, which is roughly what analysts are expecting for Oracle. Microsoft also enjoys greater revenue growth at 4.7%, but the effect on its EPS was marginal, increasing the figure by just 1.29% over the same quarter last year. Microsoft is priced a little higher as well. The company has a forward price to earnings ratio of 10.44, a price to book ratio of 4.12 and a price to cash flow ratio of 9.10.

All in all, I think Oracle is a real contender. I look for this company to do great things in the coming months and recommend the company as a buy.

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