Rating Update: Stock Rating C-Neutral (2/6/20)-Oracle Corp (ORCL).

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BUSINESS

Oracle Corporation develops, manufactures, markets, sells, hosts, and supports application, platform, and infrastructure solutions for information technology (IT) environments worldwide. The company provides services in three primary layers of the cloud: Software as a Service, Platform as a Service, and Infrastructure as a Service. It offers human capital and talent management, enterprise resource planning, customer experience and relationship management, procurement, supply chain management, project portfolio management, business analytics and enterprise performance management, and industry-specific application software, as well as financial management and governance, and risk and compliance applications.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, ORCL is expected to continue to be a major Value Builder.

Oracle has a current Value Trend Rating of C (Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing highly consistent signals. Oracle has a neutral Appreciation Score of 58 and a neutral Power Rating of 47, resulting in the Neutral Value Trend Rating.

Oracle’s stock is selling below targeted value. The current stock price of $54.71 compares to targeted value 12 months forward of $68.
This neutral appreciation potential results in an appreciation score of 58 (42% of the universe has greater appreciation potential.)
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Oracle has a Power Rating of 47. (This neutral Power Rating indicates that Oracle’s chances of enjoying favorable investment performance over the near to intermediate term are only average.)
Contributing to this neutral Power Rating: recent price action has been neutral. Offsetting factors are is currently in a modestly favorable positi; and earnings estimate behavior for Oracle has been slightly favorable recently.

INVESTMENT PROFILE

Oracle’s financial strength is exceptional. Financial strength rating is 94.
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Relative to the S&P 500 Composite, Oracle Corp has slightly more Growth than Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that ORCL is normal risk. High forecasted profitability is a positive for Oracle. Relative weaknesses include: high financial leverage, and low historical growth. Oracle’s valuation is moderate: moderate dividend yield, low P/E ratio, and high price/book ratio. ORCL has unusually high market capitalization.

CURRENT SIGNALS

Oracle’s current operations are strong. Return on equity is rising, reflecting: improving asset utilization; and rising tax keep rate.

Oracle’s current technical position is mixed. The stock price is in a 6.8 month up move. The stock has appreciated 35.9% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Positive development: significant quarterly earnings acceleration occurred. Negative development: the stock’s power rating fell below 50.
The stock is currently rated C.
Oracle Corp (NYSE: ORCL) stock closed at $24.34 on 2/6/20 after a major increase of 11.3%. However, below average trading volume at 82% of normal accompanied the advance. The stock has risen 2.8% during the last week and has performed in line with the market over the last nine months.

CASH FLOW

In 2019, Oracle experienced a very significant reduction in cash of -$29,434 million (-44%). Sources of cash were much lower than uses. Cash generated from 2019 EBITDA totalled +$16,876 million. Non-operating sources contributed +$393 million (+2% of EBITDA). Cash taxes consumed -$978 million (-6% of EBITDA). Re-investment in the business amounted to -$4,167 million (-25% of EBITDA). On a net basis, debt investors pulled out -$6,534 million (-39% of EBITDA) while equity investors withdrew -$35,024 million (-208% of EBITDA).
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Oracle’s Non-operating Income, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by stability for the Oracle Corp Peer Group. In most years, Oracle was in the second quartile and third quartile. Currently, Oracle is below median at +2% of EBITDA (+$393 million).

Oracle’s Cash Taxes, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by stability for the Oracle Corp Peer Group. In most years, Oracle was in the third quartile and second quartile. Currently, Oracle is at the upper quartile at -6% of EBITDA (-$978 million).

Oracle’s Business Re-investment, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by stability for the Oracle Corp Peer Group. In most years, Oracle was in the top quartile and second quartile. Currently, Oracle is upper quartile at -25% of EBITDA (-$4,167 million).

Oracle’s Debt Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Oracle Corp Peer Group. (Since 2017 Debt Investors, %EBITDA has accelerated very sharply.) In most years, Oracle was in the top quartile and second quartile. Currently, Oracle is lower quartile at -39% of EBITDA (-$6,534 million).

Oracle’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Oracle Corp Peer Group. (Since 2017 Equity Investors, %EBITDA has accelerated very sharply.) In most years, Oracle was in the top quartile and third quartile. Currently, Oracle is lower quartile at -208% of EBITDA (-$35,024 million).

Oracle’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Oracle Corp Peer Group. (Since 2017 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Oracle was in the top quartile and second quartile. Currently, Oracle is lower quartile at -174% of EBITDA (-$29,434 million).
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Oracle’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Oracle Corp Peer Group. (Since 2017 Cash, %Revenue has experienced a very sharp decline.) In most years, Oracle was in the top quartile. Currently, Oracle is upper quartile at +96%.

PROFITABILITY

Oracle’s return on equity reached a new post-2010 high in 2019.
A major analytical focus for ORCL is a very strong negative trend in pretax operating return a significantly offset by very strong positive trend in non-operating factors.
The productivity of Oracle’s assets declined over the full period 2010-2019: asset turnover has suffered a strong overall downtrend although it experienced a very sharp recovery after the 2016 low.
Non-operating factors (income taxes and financial leverage) had a very significant positive influence on return on equity.
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Oracle’s return on equity is upper quartile (70.2%) for the four quarters ended November, 2019.
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Operating performance (pretax return on assets) is at median (12.6%) reflecting asset turnover that is at the lower quartile (0.40X) and above median pretax margin (31.4%).
Tax “keep” rate (income tax management) is at the upper quartile (88.1%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is upper quartile (6.33X).

GROWTH RATES

Overall, Oracle’s growth rate has slowed very considerably in recent years.
Oracle’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 6.4% per year.

Total asset growth has been 10.6% per year. (More recently it has been -6.0%.)

Annual E.P.S. growth has been 5.3% per year.

Equity growth has been -1.0% per year. (More recently it has been -32.3%.)

Oracle’s consensus growth rate forecast (average of Wall Street analysts) is 8.8% — above the average of the historical growth measures.
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Relative to the Oracle Corp Peer Group, Oracle’s historical growth measures are erratic. Total asset growth (10.6%) has been at the upper quartile. Revenue growth (6.4%) has been at median. E.P.S. growth (5.3%) has been slightly below median. Equity growth (-1.0%) has been substantially below median.

Consensus growth forecast (8.8%) is slightly above median.
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PRICE HISTORY

Over the full time period, Oracle’s stock price performance has been below market. Between April, 2009 and February, 2020, Oracle’s stock price rose +183%; relative to the market, this was a -26% loss. Significant price move during the period: 1) September, 2015 – June, 2019: +58%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 6.3% is below median relative to the S&P 500 Composite.
In addition to being below median relative to S&P 500 Composite, current annual total return performance through January, 2020 of 6.3% is lower quartile relative to Oracle Corp Peer Group.

Current 5-year total return performance of 6.3% is below median relative to the S&P 500 Composite.
Through January, 2020, with below median current 5-year total return of 6.3% relative to S&P 500 Composite, Oracle’s total return performance is lower quartile relative to Oracle Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, ORCL’s overall valuation is normal. The highest factor, the price/equity ratio, is upper quartile. Ratio of enterprise value/revenue is above median. Ratio of enterprise value/assets is above median. Ratio of enterprise value/earnings before interest and taxes is near the lower quartile. The lowest factor, the price/earnings ratio, is near the lower quartile.

Relative to Oracle Corp Peer Group, ORCL’s overall valuation is low. The highest factor, the price/equity ratio, is at the upper quartile. Ratio of enterprise value/revenue is at median. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/earnings before interest and taxes is at the lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.
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Oracle has a large value gap compared to median valuation. For ORCL to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 5.10X to 4.50X. If ORCL’s ratio of enterprise value/revenue were to decline to 4.50X, its stock price would be lower by $-7 to $47.
For ORCL to achieve upper quartile valuation relative to the Oracle Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 5.10X to 6.28X. If ORCL’s ratio of enterprise value/revenue were to rise to 6.28X, its stock price would increase by $15 from the current level of $55.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, ORCL is expected to continue to be a major Value Builder.
Oracle’s current Price Target of $68 represents a +25% change from the current price of $54.71.
This neutral appreciation potential results in an appreciation score of 58 (42% of the universe has greater appreciation potential.)
Reinforcing this neutral Appreciation Score of 58, the neutral Power Rating of 47 contributes to an Value Trend Rating of C.
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Oracle’s current Price Target is $68 (+10% from the 2019 Target of $62 and +25% from the 02/06/20 price of $54.71). This slight rise in the Target is the result of a -2% decrease in the equity base and a +12% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted decline in growth has a large negative impact.
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PTR’s return on equity forecast is 67.0% — substantially above our recent forecasts. Forecasted return on equity exhibited a modest, erratic increase between 2011 and 2019. The current forecast is significantly above the 2016 low of 18%.

PTR’s growth forecast is 3.0% — slightly below our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2011 and 2019. The current forecast is well below the 2013 peak of 10%.

PTR’s cost of equity forecast is 9.4% — in line with recent levels. Forecasted cost of equity variable but little changed between 2011 and 2019. The current forecast is steady at the 2011 peak of 10.1%.
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At Oracle’s current price of $54.71, investors are placing a positive value of $17 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 5.0% per year, and a return on equity of 52.4% versus a cost of equity of 9.7%.
PTR’s 2021 Price Target of $68 is based on these forecasts and reflects an estimated value of existing assets of $48 and a value of future investments of $20.

About John Lafferty 61401 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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