Why Oracle Is a Buy Ahead of Earnings

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

Since Oracle's (NYSE: ORCL) stock reached its year low of $25.33 in May, not many equities have outperformed that of the database giant, which has soared 30% over the past 6 months. Nonetheless, the company remains in the shadows of Salesforce.com (NYSE: CRM) when discussing the ever-changing demands of the cloud market. But why?

Oracle has consistently outperformed rivals such as SAP (NYSE: SAP) and IBM (NYSE: IBM) despite a market that has been ravaged by poor enterprise spending. What’s more, with Oracle’s Fusion technology, the company is beginning to discover more ways to create separation from the competition that seems poised to consolidate.

With Fusion, Oracle is able to offer customers a way to create smart business applications while making otherwise complex IT tasks more efficient. This is an area that investors should be excited about. However and equally important, it is a business that both SAP and IBM want desperately to dominate. But Oracle has no plans on giving it up and its Q1 performance proved why.

Now, with Oracle due to report on Q2 fiscal 2013 on Tuesday, we can easily make the case why the stock is a strong buy heading into the New Year. Oracle reported revenues of $8.2 billion for the three months ending in August – representing a drop of 2%, missing the Street's expectations by $200 million.

However, the company did manage to produce net income of $2 billion or $0.41 cents per share, which was a year-over-year increase of 11%. On a non-GAAP basis, EPS arrived at $0.53 cents, in line with street estimates. I will concede that the numbers were nothing to write home about. But the company was able to offset this by announcing record levels of free cash flow, which arrived at $13.4 billion over the past four quarters.

Similarly, during that span, operating cash flow increased to $14 billion. Of which, $5.7 billion was generated in the just completed quarter. As a sign of its commitment to returning value to shareholders, Oracle announced that it had purchased over 100 million shares of its stock during the quarter.

It was also an encouraging sign that the company was able to report higher-than-expected growth in its software license segment. This was in addition to proclaiming new cost-cutting measures to help improve profitability. Also impressive was the degree to which the company’s Exadata, Exalogic, Exalytics and other engineered systems grew – exceeding more than 100% in the quarter.

Likewise, for the full-year, Oracle expects to double engineered systems sales to well over $1 billion. All of this is projected while the company’s new cloud business should also approach a $1 billion annual run rate. These businesses, in addition to Fusion, will be critical in driving Oracle’s growth for the future.

Investors will pay special attention to Q2 results to determine how well Oracle is able to maintain its momentum. The Street is expecting earnings per share of $0.58 which will represent a year-over-year increase of 9.4%. On the other hand, over the past three months, estimates have dropped by a penny from $0.59 - no huge deal there. 

Nonetheless, estimates for the full fiscal year have remained unchanged with earnings per share expected to arrive at $2.53. Analysts are expecting revenue to grow almost 3% in the quarter to $9.03 billion, while full fiscal year revenue is expected to come in at $38.29 billion. 

I think these are pretty conservative numbers that I expect Oracle to beat. The company realizes that it cannot rest on its laurels. the competition remains fierce and Salesforce.com, SAB and IBM will not rest until they put each other out of business. However, can the company overcome weak enterprise spending while also adjusting to a consolidating sector? Early indicators are that it can and it will.

Bottom Line

While I do expect Oracle to beat its numbers for the quarter, the question will be with how it guides. This is what will determine how investors deal with the stock. With shares now trading at $32, Oracle’s growth projections suggest a fair market value of $35 - this is even on the most conservative assumptions.

The bullish case for Oracle is simple, as businesses continue to strive for growth, it will place more demand on IT services. And as these services get more complicated, it will require the level of expertise that Oracle provides to make things simpler while reducing overhead. Oracle is a solid buy.

rsaintvilus has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines and Oracle and has the following options: long JAN 2013 $50.00 puts on Salesforce.com. Motley Fool newsletter services recommend Salesforce.com and International Business Machines. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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