Horizon Looks Bright For Oracle

| About: Oracle Corporation (ORCL)
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Oracle Corp. (NYSE:ORCL) is a major supplier of computer server and storage systems, as well as the world's largest enterprise software company. I recommend a buy rating on the stock as ORCL has delivered satisfactory financial performance in the past with strong potential to drive up its software margins, attractive valuations, and offers impressive cash return. In addition, its new database (12c) product life cycle and sales force stability will have a positive impact on its future earnings.

Financial Performance
Recently, the company reported its financial performance for 1Q FY'14. After a disappointing execution in the previous two quarters, ORCL was able to post solid results for 1Q FY'14 and registered a healthy start for the fiscal year 2014. Reported revenues for the quarter came out to be $8.38 billion, representing an increase of 2% year-on-year, within the management's revenue guidance range of 2%-5%. Foreign exchange movements had an adverse impact of 2% on the quarterly revenue, in contrast to the management's forecast of 1%. Also, the company reported a healthy bottom line result for the quarter; non-GAAP EPS for the quarter came out to be $0.59, beating analyst estimates by $0.03, up 12% year-on-year.

As the company has markets all around the world, foreign currency exposure remains a risk to the company's top and bottom lines. In the recent first quarter, foreign currency movements shaved away 2% of ORCL's total revenue. The company was able to post solid results for Americas and Asia Pac regions, whereas results for the European region remained soft. European results for the quarter were negatively affected by a 5% drop in license revenues due to weaknesses in all products, except Database, but weak results were mostly attributed to a macro slowdown rather than execution issues. Americas' revenues for the quarter were up 15% year-on-year. The important factors that derived solid growth in the Americas' quarterly revenues were improved sales execution, acquisitions, strengthening in database and application sales. Asia Pacific experienced a healthy revenue growth of 5% year-on-year, as the company benefited from customers wins at Hitachi and China Mobile.

As compared to the previous two quarters, ORCL's license execution improved in the recent fiscal first quarter. License revenues for the quarter were up 7% year-on-year. The solid performance of license revenues was driven by the Database 12c release and purchases of Database optional enhancement. Performance of Hardware remained disappointing in the recent fiscal first quarter, as revenues dropped by almost 14% to $669 million, below the guidance range of 7%-1%.

Key Stock Price Catalysts
I believe the database 12c product life cycle and sales force stability remain among the important performance drivers for ORCL. Product cycles in the applications and database segments have the potential to accelerate the company's future growth, which can lead to multiple expansion and possible price appreciation. Also, a customer base of nearly 400,000, which generates almost 80% of the operating income through recurring revenues, bode well for the company's future financial performance.

The other stock price drivers for ORCL are a healthy share repurchases program and decent dividend yield of 1.5%. In the recent first fiscal quarter, the company repurchased $2.68 billion worth of shares, as compared to $2.56 billion worth of share repurchases in 1Q FY'13. The company anticipates spending $12 billion in share repurchases in the ongoing fiscal year (2014), which translates into 7.5% of the current market cap of $156.9 billion.

Management of the company issued cautious second quarter guidance. The company expects second quarter non GAAP EPS to range in between $0.65-$0.70, in contrast to consensus estimates of $0.69. ORCL forecast total revenue growth to range from 1%-4% for the second quarter, translating into total quarterly revenue of $9.02 billion - $9.29 billion. Analysts have projected an impressive growth rate if 10% per annum for the next five years for ORCL. The following table shows the analysts EPS forecast from 2014 through 2016.

May 2014

May 2015

May 2016

ESP est.




Source: Nasdaq.com

I believe, ORCL is a good investment opportunity for investors. The company has been share holder friendly in terms of cash return, has recurring EPS and has attractive growth potential. Analysts have projected 10% growth rate for the next five years. Also, valuations for the company remain attractive. Currently, ORCL is trading at a cheap forward P/E of 10.70x, at a 30% discount to the S&P 500; which has a forward P/E of 15.15x. The stock is also trading at discount and is attractively valued compared with ORCL's own last five year P/E average of 17x. Therefore, I recommend 'buy rating' on the stock.

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