Software Stocks

Oracle Corporation Valuation – January 2019 $ORCL

Company Profile (excerpt from Reuters): Oracle Corporation (Oracle), incorporated on October 9, 2005, provides products and services that address all aspects of corporate information technology (IT) environments, including application, platform and infrastructure. The Company’s businesses include cloud and on-premise software, hardware and services. Its cloud and on-premise software business consists of three segments, including cloud software and on-premise software, which includes Software as a Service (SaaS) and Platform as a Service (PaaS) offerings, cloud infrastructure as a service (IaaS) and software license updates and product support. Its hardware business consists of two segments, including hardware products and hardware support. Its services business includes activities, such as consulting services, enhanced support services and education services, among others.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of ORCL – January 2019

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 $178,674,331,867 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.80 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 22.73% Fail
6. Moderate PEmg Ratio PEmg < 20 24.31 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 6.12 Fail
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 2.80 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.41 Fail
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 Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $2.05
MG Growth Estimate -1.01%
MG Value $13.29
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth $29.71
MG Value based on 0% Growth $17.41
Market Implied Growth Rate 7.91%
Current Price $49.81
% of Intrinsic Value 374.79%

Oracle Corporation does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $2.2 in 2015 to an estimated $2.05 for 2019. This level of demonstrated earnings growth does not support the market’s implied estimate of 7.91% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Oracle Corporation revealed the company was trading above its Graham Number of $26.99. The company pays a dividend of $0.76 per share, for a yield of 1.5% Its PEmg (price over earnings per share – ModernGraham) was 24.31, which was below the industry average of 50.37, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-7.94.

Oracle Corporation scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$7.94
Graham Number $26.99
PEmg 24.31
Current Ratio 2.80
PB Ratio 6.12
Current Dividend $0.76
Dividend Yield 1.53%
Number of Consecutive Years of Dividend Growth 10

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Most Recent Balance Sheet Figures

Balance Sheet Information 11/1/2018
Total Current Assets $56,938,000,000
Total Current Liabilities $20,315,000,000
Long-Term Debt $51,561,000,000
Total Assets $118,318,000,000
Intangible Assets $49,881,000,000
Total Liabilities $87,263,000,000
Shares Outstanding (Diluted Average) 3,817,000,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.83
May2018 $0.90
May2017 $2.21
May2016 $2.07
May2015 $2.21
May2014 $2.38
May2013 $2.26
May2012 $1.96
May2011 $1.67
May2010 $1.21
May2009 $1.09
May2008 $1.06
May2007 $0.81
May2006 $0.64
May2005 $0.55
May2004 $0.50
May2003 $0.43
May2002 $0.39
May2001 $0.44
May2000 $1.05
May1999 $0.22

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.05
May2018 $1.76
May2017 $2.20
May2016 $2.19
May2015 $2.20
May2014 $2.09
May2013 $1.84
May2012 $1.56
May2011 $1.29
May2010 $1.06
May2009 $0.93
May2008 $0.80
May2007 $0.65
May2006 $0.54
May2005 $0.48
May2004 $0.49
May2003 $0.49

Recommended Reading:

Other ModernGraham posts about the company

Oracle Corporation Valuation – March 2018 $ORCL
9 Best Stocks For Value Investors This Week – 7/23/16
Oracle Corporation Valuation – July 2016 $ORCL
19 Best Stocks For Value Investors This Week – 1/9/16
Oracle Corporation Valuation – January 2016 Update $ORCL

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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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