Why Oracle Is a Good Value

Oracle‘s ($ORCL) fiscal Q4 earnings report comes out next week and I wanted to pass along this chart of the stock along with its earnings-per-share trend.

As I usually do, I put the share price in blue and it follows the left scale while the EPS is in gold and it follows the right scale. The two lines are scaled at a ratio of 16 to 1 which means that the P/E Ratio is exactly 16 whenever the lines cross. The future part of the earnings line represents Wall Street’s consensus.

The chart makes a few important points more clearly in graphic form than I could explain verbally. The first is that Oracle’s valuation is still rather subdued. The stock’s P/E Ratio is almost exactly the same as the S&P 500′s even though its earnings have fared much better than the overall market. As you can see, the earnings line was barely impacted by one of the worst recessions of the last 70 years. The rest of Corporate America, in contrast, saw its earnings plunge and we still haven’t made record earnings yet.

The other point is that you can see how tepid Wall Street’s earnings projections are. If the future earnings projection is correct, it would be a dramatic deceleration of earnings growth (slowing of growth).

I understand the need for conservative estimates and that’s most likely the sounder strategy, but I wanted to show you precisely what that means. If Oracle’s stock keeps tracking its earnings, I think it’s very likely that the stock will hit $36 before the end of the year. That’s about a 13% jump from yesterday’s close.

Oracle likes to the play the “set-the-bar-low-and-guide-higher” game, and they play it very well. In March, for example, Oracle “shocked” Wall Street when it said it was expecting fiscal Q4 earnings to range between 69 cents and 73 cents per share.

I think it’s interesting that Oracle was willing to give us this news when the quarter wasn’t even one month old. At the time, the Street was expecting 66 cents per share. Now the consensus is up to 71 cents per share.

The company also gave us a 20% dividend increase recently. (Well…it was from five cents to six cents.) Look for a modest earnings beat, say, 73 cents per share. I’ll be interested to hear any guidance for the August quarter. Wall Street currently expects earnings of 46 cents per share.

Posted by on June 15th, 2011 at 9:54 am

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