Goldman: Oracle Looking Cheap

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 |  Includes: BEAS, ORCL
by: Eric Savitz

Oracle (NYSE:ORCL) shares are higher Thursday morning following a bullish note from Goldman Sachs analyst Sarah Friar. She “reinstated” her Buy rating on the stock with a $24 price target.

This is not an upgrade, exactly. Although it is not obvious from the report, I believe Goldman previously had suspended its rating on the stock; the firm was BEA’s adviser in its recent sale to Oracle. Nonetheless, it is a pretty bullish review of the company’s prospects.

Friar notes that the stock through last night had been down 18% year to date, dropping the stock to 15.8x 2008 estimated EPS, and 12.2x 2009, including stock options. That’s below the software group average at 19.7x/17.6x and the S&P 500 at 16x/15x.

Friar also adjusted her EPS estimates for the company to reflect the acquisition of BEA (BEAS). She now sees $1.26 this year, $1.47 next year and $1.63 in 2010, from $1.26, $1.46 and $1.60. (On a non-GAAP basis, she sees $1.22, $1.41 and $1.58.)

Friar says Goldman has a cautious view of the economies in the U.S. and Europe, but that Oracle is a defensive holding in the tougher macro environment “due to diversified geographic and vertical exposure,” and with nearly half of revenue coming from recurring maintenance.

Friar says the company’s acquisition strategy “seems to be paying off,” and adds that “the addition of BEA will create more up-sell opportunity in high growth areas such as China.

The company’s fiscal Q3 earnings report, due March 26, should “provide some relief to the shares,” Friar says.

Update: Also this morning, Merrill Lynch’s Kash Rangan upgraded the stock to Buy from Hold, with a $21.40 price target. “If history is any indication, we expect management to sound bullish on the May quarter outlook,” he writes. “There is a slight chance management could temper outlook for the U.S. business due to economic concerns. We would be aggressive buyers on weakness if that happens.” Rangan says Oracle is his favorite large cap pick.

Oracle Thursday morning is up 56 cents, or 3%, at $19.36.