Oracle: Slower Growth Equals More Buybacks

| About: Oracle Corporation (ORCL)

It was a very interesting Monday for shares of technology and software giant Oracle (NASDAQ:ORCL). Shares traded down about 2% after comments from UBS about a possible resignation of a key executive. The UBS report stated that an executive was planning to, or already had, left the company, and a formal announcement was to be made prior to or at the company's earnings announcement on Thursday. Well, the report seems to have been right, and strangely enough, the company reported fourth quarter and full year results after the bell, a few days earlier than expected.

The company reported non-GAAP revenues of $11.0 billion, which were up 1% from the prior year period, and beat expectations by about $110 million. Non-GAAP earnings per share rose 10% to $0.82 per share, beating estimates by four cents. You can find all of the financial statements in the company full report here.

There were a couple of bright spots. Despite GAAP revenues up just 1% year over year, GAAP operating income was up roughly 5%. Operating margins for the period increased from 40.45% to 42.10%. Net profit margins also rose in the period, up from 29.78% to 31.61%.

However, forward looking guidance was very conservative, and the company blamed that fact on macroeconomic headwinds. For the fiscal first quarter, the company expects revenues to be in a range of minus 2% to plus 1% for the quarter, well below street estimates for 3.3% growth. Earnings per share guidance was a range of $0.51 to $0.55, in-line with a $0.53 consensus. Also, Keith Block, executive vice president for the company's sales and consulting groups in North America, is leaving, according to reports.

So the company is entering a period of sluggish growth, and trying to take on a Cisco Systems (NASDAQ:CSCO) like approach. What do I mean by that? Well, Cisco has had sluggish growth for a number of years, but is trying to grow its stock price by buying back massive amounts of stock. Well, Oracle announced with its earnings report that the Board of Directors has approved an additional $10 billion in stock buybacks. So, if you can't grow your revenues and earnings much, you might as well buy back stock. Many have been critical of Cisco for its buybacks that have been widely ineffective, so we'll see if Oracle can make theirs work. Only time will tell.

So where does that leave Oracle as an investment? Well, a few weeks ago, I liked the name and suggested getting in while the price was low. At that time, Oracle was at about $26.36, and the stock was trading at $28.50 early Tuesday morning. Obviously, the buyback will provide a bit of a floor to the name, but I'm less thrilled about the company's growth prospects. Oracle grew revenues at about a 4% clip in the just reported fiscal year, and is expected for about 5%-6% growth in the next fiscal year. Competitor SAP (NYSE:SAP) is expected to grow revenues by 12.4% this year (calendar year) and 8.5% next year. SAP trades at about a 10% premium on a price to earnings valuation, but that might be worth it for the extra growth. Also, SAP is currently paying an annual yield of 1.2%, while Oracle is at about 0.9% annually. Personally, I'd even venture into Microsoft (NASDAQ:MSFT) before Oracle. Microsoft is growing revenues at about a 5.5% clip this fiscal year (ending June), and 9.7% in the next fiscal year. Microsoft also pays a 2.7% dividend currently, and is buying back plenty of stock like Oracle will be. Microsoft also trades at a P/E of 11 compared to the roughly 14.5 from Oracle.

I really liked Oracle in the low $26's a few weeks ago, but I'm not as thrilled with it at $28.50, especially with the lack of growth coming. Also, the executive departure is worrisome. What does he know that investors don't? Had Oracle given a slightly more positive view going forward, I would be recommending that investors buy with the added share repurchase plan. But with revenues possibly declining year over year, I've shifted from a buy to a hold on the name. There are better names out there at this point.

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