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ModernGraham Valuation: Oracle Corp (ORCL)

moneyCompany Profile (obtained from Google Finance): Oracle Corporation is a provider of enterprise software and computer hardware products and services. The Company’s software, hardware systems, and services businesses develops, manufactures, markets, hosts and supports database and middleware software, applications software, and hardware systems, with the latter consisting primarily of computer server and storage products. It is organized into three businesses: software, hardware systems and services. Its software business consists of two segments: new software licenses and software license updates and product support. Its hardware systems business consists of two segments: hardware systems products and hardware systems support. The Company’s services business consists of the remainder of its segments and offers consulting services, managed cloud services, and education services. On April 5, 2012, the Company acquired Taleo Corporation (Taleo). Effective March 13, 2013, it acquired Nimbula Inc.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $82.95
MG Opinion Undervalued
Value Based on 3% Growth $31.24
Value Based on 0% Growth $18.31
Market Implied Growth Rate 4.19%
Net Current Asset Value (NCAV) $0.57
PEmg 16.88
Current Ratio 3.38
PB Ratio 3.76

Balance Sheet – 11/30/2013 

Current Assets $44,252,000,000
Current Liabilities $13,110,000,000
Total Debt $22,641,000,000
Total Assets $85,238,000,000
Intangible Assets $34,790,000,000
Total Liabilities $41,675,000,000
Outstanding Shares 4,506,000,000

Earnings Per Share

2014 (estimate) $2.57
2013 $2.26
2012 $1.96
2011 $1.67
2010 $1.21
2009 $1.09
2008 $1.06
2007 $0.81
2006 $0.64
2005 $0.55
2004 $0.50
2003 $0.43

Earnings Per Share – Modern Graham 

2014 (estimate) $2.15
2013 $1.84
2012 $1.56
2011 $1.29
2010 $1.06
2009 $0.93

Conclusion:

Oracle Corporation is a company that has displayed strong and consistent earnings growth, and passes the majority of the requirements of both the Defensive Investor and the Enterprising Investor.  The company does not qualify for the Defensive Investor, however, because it is currently trading at a high PB ratio and it has not paid a dividend long enough.  The Enterprising Investor is not as picky and Oracle passes all five of the investor type’s requirements.  As a result, Enterprising Investors should feel comfortable proceeding with further research into whether Oracle would be suitable for their individual portfolios.  One example of further research would be to review the ModernGraham Valuation of International Business Machines (IBM) and the ModernGraham Valuation of Microsoft (MSFT).  From a valuation perspective, the company’s strong growth of EPSmg from $0.93 in 2009 to an estimated $2.15 for 2014 results in a very favorable result through the ModernGraham valuation model.  The market is currently implying a growth estimate of 4.19%, but Oracle has easily grown faster than that over the historical period we’ve reviewed, and would therefore appear to be undervalued at this time.

What do you think?  Do you agree that Oracle Corporation is undervalued?  Is the company suitable only for Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Oracle Corporation (ORCL) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill

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