Oracle By the Numbers

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At a time when both cloud computing and software-as-a-service (SaaS) are on the rise, seeing adoption rates accelerating, Oracle (NYSE: ORCL) appears to be undervalued relative to its peers. While I remain positive on the company based on catalysts like its role in the J.C. Penney (NYSE: JCP) turnaround, based on a pure comparison of various financial metrics, the stock is a buy at current levels. Management has successfully taken needed steps to trim costs, meaning that the growth prospects for the company will have an even more dramatic impact. Overall, the stock represents a solid option for inclusion in your core portfolio.

Valuation Metrics

Oracle is currently trading at a trailing P/E ratio of 15.5 and a forward P/E of just under 11. Based on consensus analyst expectations, the stock carries an expected 5-year PEG ratio of 0.97. These multiples are low given the strength of the company relative to its peers. SAP (NYSE: SAP) has a trailing P/E of 22.9 and a PEG of 1.58, IBM (NYSE: IBM) has a trailing P/E of 13.9 and a PEG of 1.34 and Microsoft (NASDAQ: MSFT) has a trailing P/E of 16 and a PEG of 1.14. While I am bullish of both IBM and Microsoft for other reasons, Oracle’s overall positioning make its multiples attractive.

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ORCL data by YCharts

Looking at the chart above, Oracle has lagged only SAP thus far this year, which is telling because SAP is Oracle’s most direct competitor. When you consider the cost-cutting measures taken by the company, however (discussed in more detail below), Oracle is well-positioned to make up this performance lag moving forward. The company has stronger growth prospects than SAP, as reflected in its more attractive PEG ratio, and should be a solid performer heading into the rest of the year.

Other Metrics

Oracle carries a gross margin of 79% relative to 71% for SAP, 48% for IBM and 75% for Microsoft. The company has an operating margin of 38% relative to 29% for SAP, 21% for IBM and 36% for Microsoft. Oracle was able to achieve a 7% reduction in operating expenses in the most recent reporting quarter, while simultaneously increasing research and development (R&D) spending by 14%. Management’s ability to cut costs without sacrificing R&D suggests that the above industry-leading margins may continue to improve into the future.

In the same quarter, despite a 2.3% year-over-year decline in revenues, the company achieved year-over-year earnings growth of over 10%. Oracle’s dividend yield of 0.8% is not reason alone to buy the stock, but when coupled with the discipline of management and the positive earnings growth, the stock looks attractive. When the solid valuation measures are added, the stock becomes a strong buy at current levels.

Other Considerations

As mentioned above, there are other positive catalysts for the stock. One that I believe is of particular note is the relationship that Oracle enjoys with J.C. Penney. While the retailer is in the midst of a multi-year turnaround play, the position of Oracle as its technology partner is critical. Oracle is helping the re-envisioned J.C. Penney shift away from the classic checkout model, and ultimately may include RFID technology in its stores. Betting on J.C. Penney may be premature, but Oracle is gaining valuable insight from the project that it has already begun to deploy with other customers. The company’s strengthening position in the retail space is yet another favorable aspect of the stock that makes it a buy.

The Trade

Based on each of the above considerations, Oracle is a buy at current levels for your core portfolio. The company has several positive features that speak well of its prospects for the short, intermediate and longer-terms. Oracle absolutely deserves a portion of your technology allocation.

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Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines, Microsoft, and Oracle. Motley Fool newsletter services recommend International Business Machines and Microsoft. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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