Software Stocks

Oracle Corporation Analysis – October 2015 Update $ORCL

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – September 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Oracle Corporation (ORCL) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Oracle Corporation (Oracle) is a provider of enterprise software and computer hardware products, and services. The Company’s offerings include Oracle database and middleware software, application software, cloud infrastructure, hardware systems including computer server, storage and networking products, and related services. It operates through various segments, including new software licenses and cloud software subscriptions, which include software licenses and Oracle Cloud offerings; cloud infrastructure-as-a-service, which provides deployment and management offerings; software license updates and product support, which includes support, enhancements and upgrades for Oracle software products; hardware systems products, which includes servers, storage, networking, virtualization software, operating systems and management software; hardware systems support, which provides software updates for software components, and services business, which offers consulting services.

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is a free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of ORCL

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $154,963,039,752 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 4.04 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 139.19% Pass
6. Moderate PEmg Ratio PEmg < 20 15.84 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 3.45 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 4.04 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.86 Pass
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

ORCL value chart October 2015

EPSmg $2.33
MG Growth Estimate 7.43%
MG Value $54.35
Opinion Undervalued
MG Value based on 3% Growth $33.75
MG Value based on 0% Growth $19.78
Market Implied Growth Rate 3.67%
Current Price $36.87
% of Intrinsic Value 67.84%

Oracle Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the short dividend history and the high PB ratio.  The Enterprising Investor has no initial concerns.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.56 in 2012 to an estimated $2.33 for 2016.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 3.67% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Oracle Corporation (ORCL)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

ORCL charts October 2015

Net Current Asset Value (NCAV) -$0.11
Graham Number $24.82
PEmg 15.84
Current Ratio 4.04
PB Ratio 3.45
Dividend Yield 1.46%
Number of Consecutive Years of Dividend Growth 3

 

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Useful Links:

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GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Total Current Assets $62,122,000,000
Total Current Liabilities $15,391,000,000
Long-Term Debt $40,050,000,000
Total Assets $109,706,000,000
Intangible Assets $40,088,000,000
Total Liabilities $62,609,000,000
Shares Outstanding (Diluted Average) 4,412,000,000

Earnings Per Share History

Next Fiscal Year Estimate $2.49
May15 $2.21
May14 $2.38
May13 $2.26
May12 $1.96
May11 $1.67
May10 $1.21
May09 $1.09
May08 $1.06
May07 $0.81
May06 $0.64
May05 $0.55
May04 $0.50
May03 $0.43
May02 $0.39
May01 $0.44
May00 $1.05
May99 $0.22
May98 $0.14
May97 $0.14
May96 $0.10

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $2.33
May15 $2.20
May14 $2.09
May13 $1.84
May12 $1.56
May11 $1.29
May10 $1.06
May09 $0.93
May08 $0.80
May07 $0.65
May06 $0.54
May05 $0.48
May04 $0.49
May03 $0.49
May02 $0.50
May01 $0.50
May00 $0.46

Recommended Reading:

Other ModernGraham posts about the company

The Best Companies of the Software Industry – August 2015
The 9 Best Stocks For Value Investors This Week – 7/18/15
Oracle Corporation Analysis – July 2015 Update $ORCL
24 Companies in the Spotlight This Week – 3/28/15
Oracle Corporation Quarterly Valuation – March 2015 $ORCL

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Google Inc. Analysis – July 2015 Update $GOOGL
Intuit Inc. Analysis – July 2015 Update $INTU
Oracle Corporation Analysis – July 2015 Update $ORCL

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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