Is Now The Time To Buy Oracle?

May.21.12 | About: Oracle Corporation (ORCL)

Oracle (NYSE:ORCL) shares have been on a slide. In the last month, shares are down over 11 percent, underperforming the Nasdaq by 4 percent. In the last year, Oracle shares are down over 25 percent. In this article, I explain why now is a good time to buy.

What's hurt Oracle as of late is the company's poor performance compared to expectations. Oracle's adjusted earnings per share is expected to only increase by 9 percent in fiscal year 2012, which ends in May. Much of the company's growth over the past few years has come from acquisitions as opposed to organic growth, which is the biggest value adder for companies' shareholders.

In the last three years, Oracle made 6 $600 million or more acquisitions totaling $13.56 billion, including the infamous acquisition of Sun Microsystems. The company made at least 17 additional acquisitions in the last three years at an undisclosed price or for less than $100 million. These acquisitions fueled Oracle's revenue growth or 32.8 percent in fiscal year 2011. Going forward, analysts expect only 3.7 percent revenue growth in 2012 and 6.5 percent revenue growth in 2013.

Oracle's biggest strength from a strategy standpoint is its current footprint in the business world. Switching costs for enterprise systems are incredibly high and the company can use its current product line to leverage new products that it produces or acquires. This fact is the main driver of the company's business strategy. In addition, there is very little competition out there. IBM (NYSE:IBM) and SAP (NYSE:SAP) both have similar products, but the companies tend to work together more often than compete. For example, IBM has service areas dedicated to implementing Oracle and SAP products.

Now is a good time to buy Oracle because of its corporate footprint, its growing earnings, and its low price. At the close of May 18th, the stock's price was $25.61, which was 26 percent below its 52 week high and only 3.6 percent higher than its 52 week low. Expect the company to make more strategic acquisitions and leverage its size to better position the companies it acquires. I currently put a one year target price of $31.50, or 23 percent above its current price.

Disclosure: I am long IBM.