Oracle Corporation (ORCL) Quarterly Valuation – March 2014

500px-Oracle_logo.svgBenjamin 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.  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 specific look at how Oracle Corporation fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Oracle Corporation is a provider of enterprise software and computer hardware products and services. The Company provides cloud services as well as software and hardware products to other cloud service providers, both public and private. The Company’s software business consists of two segments: new software licenses and cloud software subscriptions and software license updates and product support. The Company’s hardware systems business consists of two operating segments: hardware systems products and hardware systems support. The Company’s services business consists of the remainder of its operating segments and offers consulting services, managed cloud services and education services. Effective March 13, 2013, it acquired Nimbula Inc. Effective February 6, 2014, Oracle Corp acquired the entire share capital of Responsys Inc.

ORCL Chart

ORCL data by YCharts

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

Key Data:

Recent Price $37.50
MG Value $85.39
MG Opinion Undervalued
Value Based on 3% Growth $32.16
Value Based on 0% Growth $18.85
Market Implied Growth Rate 4.20%
Net Current Asset Value (NCAV) $0.57
PEmg 16.91
Current Ratio 3.39
PB Ratio 3.76

Balance Sheet – 2/28/2014

Current Assets $44,404,000,000
Current Liabilities $13,092,000,000
Total Debt $22,677,000,000
Total Assets $86,562,000,000
Intangible Assets $35,880,000,000
Total Liabilities $41,855,000,000
Outstanding Shares 4,483,000,000

Earnings Per Share

2014 (estimate) $2.76
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

Earnings Per Share – ModernGraham

2014 (estimate) $2.22
2013 $1.84
2012 $1.56
2011 $1.29
2010 $1.06
2009 $0.93

Dividend History

ORCL Dividend Chart

ORCL Dividend data by YCharts


Oracle Corp is a great looking company, especially for the Enterprising Investor, as the company passes all of the requirements of that investor type.  The Defensive Investor is not as interested presently due to the lack of a long enough dividend history and the high PB ratio.  As a result, Enterprising Investors seeking to follow the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company as well as other opportunities, including a review of ModernGraham’s valuation of Hewlett-Packard Company (HPQ) and ModernGraham’s valuation of International Business Machines (IBM).  From a valuation standpoint, the company appears undervalued after growing its EPSmg (normalized earnings) from $1.06 in 2010 to an estimated $2.22 for 2014.  This demonstrated level of growth outpaces the market’s implied estimate of 4.2% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well 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.

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) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.

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