Oracle Looks Undervalued
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oracle (NASDAQ: ORCL) reported disappointing earnings on December 20, and the company’s shares took a dive that brought them back to test the yearly lows near 25 USD. I believe there is a good chance we are seeing an attractive entry point for long term investors willing to look beyond last quarter’s earnings report.
From a valuation standpoint, the stock looks quite cheap if we analyze the historical ratios for Oracle. In the following table we compare different valuation metrics for the company over the last several years, and all of them support the thesis of an undervalued stock. Comparing current price to the company´s earnings, book value, sales or cash flow, we can reach the conclusion that the stock is trading at valuations not seen since the 2009 recession at least.
|
Year |
2002 |
2003 |
2004 |
2005 |
2006 |
2007 |
2008 |
2009 |
2010 |
2011 |
TTM |
|
Price/Earnigs |
29.4 |
28.5 |
24.5 |
22.2 |
24.6 |
24.7 |
16.1 |
21.4 |
23.5 |
14.1 |
14.8 |
|
Price / Book |
10.7 |
9.6 |
8.3 |
5.2 |
5.7 |
6.0 |
3.9 |
4.5 |
4.6 |
3.1 |
3.2 |
|
Price / Sales |
6.4 |
7.3 |
6.8 |
5.0 |
5.7 |
5.9 |
3.9 |
5.3 |
5.0 |
3.6 |
3.8 |
|
Price/ Cashflow |
18.7 |
22.5 |
21.4 |
18.2 |
19.6 |
17.0 |
11.4 |
14.3 |
17.6 |
10.1 |
10.6 |
TTM: Trailing twelve months.
An important question to consider is if the last disappointing quarter is a transitory problem or the beginning of something more permanent that could affect the company´s long term prospects. Management stated the main cause of the soft report was that clients were reluctant to increase spending in new software and especially in hardware. Worries about economic growth and the Eurozone crisis are seen as the central drivers of this unwillingness to increase spending by the corporate sector.
If this is the cause of the disappointment, then it is a transitory problem. Of course it could get worse in the middle term if the economic situation gets more complicated, but over the long term companies will need to invest in technology in order to keep pace with competition, enhance productivity and protect their data.
It would be an entirely different situation if Oracle´s competitors like SAP (NYSE: SAP), Microsoft (NASDAQ: MSFT) or IBM (NYSE: IBM) had launched products that were considered superior by clients and gaining market share. When a company starts losing clients to competition, the damage can be real and permanent, but that doesn´t seem to be the case here.
Just in case the economic situation gets worse, we can have a look at Oracle´s financial performance during 2009 to see how the company managed to cope with the recession. It wasn´t something that terrible after all -- they managed to earn some decent money and generate nice cash flow during the crisis, so they shouldn’t be in too much trouble if we have more problems in the economic horizon.
As long as there is no indication that Oracle is losing its competitive advantages, the firm looks like an attractive investment opportunity for long term investors looking for high quality stocks at convenient valuations.
The Motley Fool owns shares of International Business Machines, Microsoft and Oracle. acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
