Breaking Down Oracle

Sometime next week Oracle ($ORCL) will probably release its fiscal Q2 earnings report. Wall Street expects the company to report earnings of 57 cents per share. I think it will be closer to 60 cents per share.

Even if I’m wrong, Oracle is still a fairly inexpensive stock. Below is a chart of Oracle’s stock along with its earnings-per-share. The stock follows the left scale and the earnings follow the right. The two are scaled at a ratio of 15-to-1 which means that the P/E Ratio is exactly 15 whenever the lines cross. The red line is Wall Street’s estimate.

I use 15 not as a projection of what I think the earnings multiple ought to be but simply because that’s been a close enough valuation for the last several quarters. More recently, however, Oracle has fallen to a cheaper valuation.

Using some rough interpolation, Wall Street thinks Oracle can earn $2.52 per share for the entire 2012 calendar year. (Note this is just an estimate, Oracle’s quarters don’t follow the March/June/September/December cycle.) At 15 times that, Oracle’s stock could reach $37.95 by the end of next year which is a 19% rise from here.

This also doesn’t take into account the fact that Oracle has a decent track record of exceeding analysts expectations. You can even see how the red line’s trajectory seems a bit subdued from recent history. Understandably, we want our projections to be somewhat conservative.

A few years ago, Oracle started paying a modest dividend. I wouldn’t call this a major factor in the share price but it’s very possible that the company will bump up the dividend in the next few months. If Oracle raises the quarterly dividend from six cents per share to eight cents per share, the stock will then have a yield of 1%. Not much, but it’s better than nothing.

If Oracle’s earnings trend continues, then I think it’s very possible the share price will hit $40 sometime next year.

Posted by on December 6th, 2011 at 11:03 am


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.