Finance 3320
Spring 2009 West Texas A&M University Financial Analysis of
Dustin Wall
Background Larry Ellison, Bob Miner, and Ed Oates founded Oracle back in 1977 under the name Software Development Laboratories (SDL).* Larry Ellison, who is currently the chief executive officer, came across information related to a working prototype of a relational database, and the three thought there was a potential market for these databases. This information turned out to be the best thing that could have happened for the three. The first assignment given to them was to create a database for the CIA, which had a codename of “Oracle.”* With the success of the database for the CIA and the database of the same name for the commercial market two years later, an innovative business was born. The company went on to change its name to Oracle Corporation in 1982 and went public on the Nasdaq in March 1986.* Oracle is the worldwide leader in business application software. The company has products from databases, down to many different applications. There are many different companies, including Fortune 500 companies, which rely on Oracle’s products to run their business every day. Some recent developments include a new product titled FLEXCUBE Enterprise Limits and Collateral Management software to help banks**, Utilities Network Management System 1.9.0 to help distribution management, and probably the biggest news from Oracle is the announcement that they are going to pay their first dividends in company history on May 8.*** *Oracle.com/timeline **http://finance.yahoo.com/news/Oracle-Financial-Services-prnews-14916162.html?.v=1 ***http://online.barrons.com/article/SB123758869074699969.html
Industry Oracle is in the application software industry. The industry produces software that helps users improve work on the computer. Almost every user of the computer encounters some kind of application that they use for tasks. Words processors, spreadsheets, databases, media players, and publishing are some examples of the types of software applications that are out there. The industry is currently performing well when compared with other industries that hurting, specifically the financial industry. Oracle currently is 2nd in total revenue for 2008 with $23.6 billion.* There are giant companies in this industry which include Microsoft, SAP, Adobe Systems, and CA Inc just to name a few. The talk is on again about Microsoft acquiring Yahoo, which would be huge. This would definitely make Microsoft even bigger and give them even more resources to develop software applications, and become a more formidable opponent to Google in the search business. * http://biz.yahoo.com/ic/ll/821tor.html
Overview of Stock Price R
Take a look at the majority of the stock charts out there and this will be a similar trend. Due to the current recession, almost all stocks have seen a decrease in share price. Oracle did fine through the first part of 2008, with the share price sliding a bit. It actually increased during the second part of 2008 whenever Bear Stearns failed and continued to do well during the summer. Oracle finally was hit hard by the recession, mainly due to the collapse of Lehman Brothers and the government bailout of AIG in September. It continued downward for the rest of the year in 2008. The stock price went as low as $13.85 on March 9, but has increased since. The stock got a nice jump due to the declaration that the company will be paying out its first quarterly dividends this year. Source: Graph from MSN Money
P/E Ratio 2008 Formula
Calculation
Price Per Share Earnings Per Share
$22.84 $1.07
Rati Industry o 21.3x 15.7x
The price per share is from the last fiscal day of 2008 for Oracle. Their P/E ratio is above average compared to the industry. I would say that Oracle is less risky than other companies in the industry. There share price has fallen in the last year, so their ratio isn’t that high any longer, but it is still a little above the industry average. Also, by just announcing that the company will start paying dividends, I don’t see a lot of growth for the company right now. They may still buy smaller companies, as bigger tech companies do, but it won’t help in terms of growth in my opinion. Source: Information in the table comes from Oracle financial statements.
Market/Book Value Ratio 2008 Formula
Calculation
Market Price Per Share Book Value Per Share
$22.84 $4.47
Rati o 5.1x
Industry 5.4x
The ratio is a little below average compared with the industry. The industry ratio is high compared with industries, so this is a good thing for Oracle. Their ratio isn’t bad at all because people are still willing to pay more for their stock according to this table. Source: Information in the table comes from Oracle financial statements.
Key Ratios Ratio
Formula
Calculation 08
Calculation 07
SAP 08 Ratio
Industry Average
18,103/10,029 = 1.8x 18,103/10,029 = 1.8x
12,883/9,387 = 1.4x 12,883/9,387 = 1.4x
1.0x
1.8x
Quick
Current assets/Current liabilities Current assetsInventories/Current liabilities
1.0x
1.8x
Asset Management Inventory Turnover DSO
Sales/Inventories
22,430/0 = NA
17,996/0 = NA
563.1x
73.1x
Receivables/Annual sales/365 Sales/Net fixed assets
5,799/61.45 = 94 days 22,430/29,165 = 0.77x 22,430/47,268 = 0.47x
4,589/49.30= 93 days 17,996/21,689 = 0.83x 17,996/34,572 = 0.52x
NA
NA
NA
NA
0.9x
0.8x
Liquidity Current
Fixed Asset Turnover Total Asset Turnover Debt
Sales/Total assets
Management Total Debt to Total Assets TIE
Total debt/Total assets EBIT/Interest charges
Profitability Profit margin on sales ROA
Net income/Total assets
BEP
EBIT/Total assets
ROE
Net income/Common equity
Net income/Sales
Market Value P/E
Price per share/Earnings per share Market/Book Market price per share/Book value per share DuPont Analysis ROA = Profit margin x Total asset turnover SAP and industry ratios come from MSN Money.
24,243/47,268 = 51% 7,844/394 = 19.9x
17,653/34,572 = 51% 5,974/343 = 17.4x
36%
24%
NA
NA
5,521/22,430 = 25% 5,521/47,268 = 12% 7,844/47,268 = 17% 5,521/23,025 = 24%
4,274/17,996 = 24% 4,274/34,572 = 12% 5,974/34,572 = 17% 4,274/16,919 = 25%
17%
23%
16%
17%
NA
NA
28%
34%
$22.84/$1.07 = 21.3x $22.84/$4.47 = 5.1x
$19.38/$0.83 = 23.3x $19.38/$3.31 = 5.9x
18.0x
15.7x
8.03x
5.4x
25% x 0.47 = 12%
24% x 0.52 = 12.5%
NA
NA
2008 Liquidity The liquidity ratios for Oracle are the same as the industry average. When compared to SAP, SAP is much lower on both. The quick ratio for Oracle is a little skewed due to the fact that they don’t carry any inventory. Overall, Oracle is up to par with the rest of the industry while SAP has some work to do. 2008 Asset Management Oracle doesn’t qualify for the inventory turnover due again to not having any inventory. The DSO for Oracle is a little high for any industry. That is over 3 months worth of time. Oracle should definitely look into reducing that number. The fixed asset turnover and total asset turnover are both a little low for Oracle. SAP has a total asset turnover very close to the industry average. Oracle isn’t in bad shape though. 2008 Debt Management Total debt to total assets for Oracle is a little high when compared to both SAP and the industry. The industry average is 24% compared to 51% for Oracle. Same thing goes for Oracle when it comes to times-interest-earned in that it is a little high. Oracle needs to look into reducing these ratios to improve their debt. 2008 Profitability
Oracle is above the industry average on everything except return on assets (ROA) and return on equity (ROE). That is a good thing in turns of profitability, but could do a little more to get closer to the average on ROE and ROA. SAP has a better percentage than Oracle in both ROA and ROE. 2008 Market Value The P/E ratio for Oracle is much higher than both SAP and the industry average. The market/book is lower than both SAP and the industry, with SAP having a much higher market/book than the industry. 2007 Ratios for Oracle In terms of actual ratios, 2007 and 2008 were very similar. The only differences were the fixed asset turnover, times-interest-earned, P/E, and market/book. All of the numbers were more in 2008, but both years produced similar ratios. It shows that Oracle is very consistent on a year-toyear basis. That is a good thing for investors to look at and see no major differences. Statement of Cash Flow: Sources and Uses 2008 Sources
Amortization of intangible assets
Proceeds from maturities and sales of marketable securities and other investments
Proceeds from issuances of common stock
Proceeds from borrowings, net of issuance costs
2008 Uses
Purchases of marketable securities and other investments
Acquisitions, net of cash acquired
Payments from repurchases of common stock
Repayments of borrowings
2007 Sources
Amortization of intangible assets
Proceeds from maturities and sales of marketable securities and other investments
Proceeds from issuances of common stock
Proceeds from borrowings, net of issuance costs
2007 Uses
Purchases of marketable securities and other investments
Acquisitions, net of cash acquired
Payments from repurchases of common stock
Repayments of borrowings
The major sources and uses were the same for both years. The major use of funds is for acquisitions, which is a good use of funds. It helps the company grow, and stops competitors from buying these smaller companies. The cash balance increased from 2007 to 2008 by a little more than $2 million. Beta Oracle has a beta of 1.0. The average beta for the application software industry is 1.0. This means that Oracle is an average-risk stock since it tends to move up and down with the average stock. If the rest of the market goes up or down 10%, then Oracle’s stock will do the same. When adding Oracle to a portfolio with an average beta of 1.0, it wouldn’t make the portfolio any less risky. Some betas from other companies in the industry include: Microsoft at .80, SAP at 1.30, Adobe at 1.15, and CA Inc at 1.05. Microsoft is a little less risky than Oracle, but Oracle is less risky than the other companies mentioned here. Overall, these stocks don’t have a lot of risk attached to them.
Dividend Policy Many tech stocks do not pay dividends and Oracle was in that list. Oracle has recently announced that they will begin paying a quarterly dividend at $0.05 a share on May 8th at $1 billion annually.* With the company paying $0.05 a share, and the stock price currently at $18.57, that would give a dividend yield of 0.027%. *http://online.barrons.com/article/SB123758869074699969.html
Growth Rate
The EPS is at $1.07. This is good as it is showing the firm is making money, and I believe the growth prospects will continue, especially given that the company is now offering a dividend. Oracle is getting more money from updating and maintaining their current products. I would buy the stock right now, mainly due to that it has been slowing increasing lately, the introduction of paying a dividend, and should be back in the $20 range soon. Investment Analysts Evaluation The following is from Valueline George A. Niemond gives a positive view of Oracle’s future prospects. He does mention how the stronger dollar has hurt Oracle’s results and the current economic condition. We are in a worldwide recession, and it has affected virtually every company out there. Niemond does talk about Oracle’s acquisitions that helped its products and other areas of the company. The main positive that helps Oracle is due to the software license, which accounts for almost 50% of the revenues. Niemond believes that Oracle has the potential to post record results in the next couple of years once the economy recovers. The following is from Morningstar Rafael Garcia also gives a positive review for Oracle. Due to Oracle having a variety of software, especially its business software, gives them a competitive advantage. Garcia, like Niemond, also talks about the great revenue that comes from software licenses. The only negative thing that Garcia does say is that there is some risk with acquisitions as Oracle could pay too much for companies. He also sees profitable growth for Oracle and that revenue will continue to grow through 2013. I agree with both men on their analysis of the company. Oracle is still doing well during this recession, and I believe will continue to get better. The stock price is already heading back to the $20 mark and revenues will keep getting better. Again, the issue of dividends can only help the company, especially since not many tech stocks offer dividends.
SWOT Analysis Strengths
Larry Ellison, the CEO, is a good leader and has been with the company since its founding.
Worldwide leader in business software applications.
A lot of cash on hand to keep making acquisitions.
Declaration of paying dividends to bring in more investors.
Strong brand name.
Weaknesses
Not many new products being produced.
Larry Ellison having too much control of the company.
Stronger dollar can hurt bottom line.
Opportunities
Possibly a player to buy Sun Microsystems if IBM doesn’t.
Continue making acquisitions to improve products.
More revenues whenever the recession slows down.
Threats
Major competitors in Microsoft, IBM, and SAP.
Possible mergers with Microsoft/Yahoo and IBM/Sun Microsystems.
The current recession.
Some companies may not be able to make payments due to recession. Good Investment?
I believe Oracle is a good investment. They have a strong, but controlling leader in Larry Ellison who has been with the company from the beginning. He doesn’t have the impact of say Steve Jobs with Apple, but he is still a great presence for the company. Again, the declaration of dividends will bring in more investors in an industry which has seemed to done well during this recession. With the recent IBM/Sun Microsystems talks, Oracle could become a player in acquiring Sun if talks fail with IBM. An acquisition likes this could help Oracle take on Microsoft and IBM even more in software and mainframes respectively. I would be more than happy to invest in the company.