Oracle Earnings Preview: Hardware Is The Drag, But 2013 Is Expected To Be Better

| About: Oracle Corporation (ORCL)
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Oracle (NYSE:ORCL), the enterprise database software giant, reports fiscal second-quarter 2013 earnings after the bell on Tuesday, Dec. 18. Analysts (as per Thomson Reuters) are expecting $0.61 in earnings per share on $9 billion in revenues, for expected year-over-year growth of 13% and 2%, respectively.

Q2 2013 estimates have changed little since the last earnings report in mid-September. Last quarter, the pleasant surprise for ORCL was "license" revenue growth, which grew 11% in constant currency vs. the +5% to +7% expected. The drag continues to be hardware or the old SunMicro business, which fell 21% in constant currency. Oracle is now spending a lot of time talking about the Cloud, but at 3% of revenues it is more myth than legend at this point for the software giant.

My own opinion is that until the Cliff gets resolved, and until "enterprise" technology spending starts to ramp again from its low to mid-single-digit state, ORCL -- while an attractively-valued stock -- won't see the earnings or revenue growth needed to drive the stock higher.

As per Thomson Reuters, here is the next few years consensus expected earnings per share and revenue growth for the software company:

fiscal year-ended EPS growth Rev growth
fiscal 2015 10% 7%
fiscal 2014 9% 7%
fiscal 2013 8% 3%

Historically, ORCL has grown at much faster rates, some of it due to very smart acquisitions. But I think the current enterprise and economic growth environment is keeping a lid on the stock. Oracle is currently trading at 10x-11x cash flow and 12x 2013's expected consensus EPS of $2.66, so we'd be a buyer of ORCL below $30 and a seller where it seems to be fairly valued in the high $30s.

ORCL has room for a bigger dividend with its current 10%-11% payout ratio, and while they have reduced fully diluted shares outstanding by 5% since late 2009, they have the cash for bigger share repurchases. But they do like to make acquisitions, thus I think their "growth via acquisition" habit constrains their returning capital to shareholders. (Oracle did accelerate their 2013 dividends into 2012 for fiscal Q2, Q3, and Q4.)

Basically, we think downside risk is limited at this point for ORCL, but until we see faster economic growth the $154 billion market cap acts like a weight on the stock. ORCL is a good candidate for buy-and-hold investors, as we await what 2013 holds the enterprise.

Oracle is like so many stocks in the market today: neither a table-pounding buy or a screaming sell at its current valuation. We are not long as we could be, and aren't in much a of hurry to sell what we have, as we await a stronger economy.

Disclosure: I am long ORCL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.