Oracle (ORCL) A Detailed Analysis of the Stock

Oracle (ORCL) An Analysis

Healthy Cash flow & Lots of Debt

Oracle Corp. (ORCL)

Sector: Technology

Industry: Application Software

Oracle Corporation, an enterprise software company, engages in the development, manufacture, distribution, servicing, and marketing of database, middleware, and application software worldwide. The company’s New Software Licenses segment provides licenses for database and middleware software, including database management, application server, business intelligence, identification and access management, content management, portal and user interaction, data integration, and development tools; and applications software that offers enterprise information for customer relationship management, financials, human resources, maintenance management, manufacturing, marketing, order fulfillment, product life cycle management, enterprise project portfolio management, procurement, sales, services, enterprise resource planning, and supply chain planning.

How well is the Company growing?

With every business we want to know if they are growing. Why would we put money into a business that is not growing? The best way to understand if a company is growing is to compare it to the industry as a whole. Since ORCL is part of Applications Software, that is what we will compare it to.

As we look at the stock, we are a bit wary of mixed signals we are getting from a growth perspective. Year to year against the Industry, ORCL appears very strong and a leader in the industry. Its growth has been more than double the Industry average. Where it comes in at 38.50% the industry is a mere 15.80%. Good signs for Oracle. Net income year over year is only 9.70% while the Industry is 27.90%. As an average trader who may not know a lot about ORCL, I might think that Oracle has quite a bit of expenses, more than the industry has as a whole for some reason. This would give me some concern.

Is ORCL still a Value?

How does one know how valuable a stock is? We have some concerns about the expenses of ORCL. Even though it has grown well over the last year, after expenses, its net income is much less than the industry average. So how valuable is this as an investment?

When we think about value we have to think about the potential growth. How much potential? Something called the price to sales ratio gives us the best indicator of this. The more money a company has coming in through sales compared to how much working capital it has speaks volume of its health. If we compare ORCL to its industry, we find a healthy industry leader. The industry comes in with a 5.13 ratio while ORCL stands at 4.18. The lower the ratio the better and ORCL has a nice lower ratio.

The second most important thing we need to consider is how much money is flowing through this company as compared to its price. This is called the price to cash flow ratio. The closer the ratio gets to that magical “100” the less capability a company has. “100” means it can just pay its bills because the value of the company is equal to the amount of money coming in and no more. The industry stands at 15.30 while ORCL is about 10% less at 13.30. Since we compare companies to their industry to define their health there are two more ratios that we consider. Each ratio is defined by how low it is. The lower the better value the company has. The price to earnings ratio (P/E Ratio) and the price to book ratio also come in lower than the industry as a whole.

Our conclusion- this is still highly under valued! We give it an “A”

Can the Company Pay its Debts?

With the financial collapse in 2008 of the markets and all the companies that would have gone under because they could not pay off their debt, we like to know how strong a company is before we are willing to invest our money in it. “Here Today, Gone Tomorrow” is not something we think wise. The first question we would ask any company is how much debt has you accumulated as compared to the amount of money and/or property you own? This is known as the debt/equity ratio. If a company has potential for growth it will have a lot more cash than it would debt. The industry ratio is 0.24 while ORCL is double this at 0.48. We don’t like this. Secondly we want to look at is a company’s ability to pay the interest on its debt.

Who wants to invest in a company that can barely pay its interest while its debt just grows fat and happy? This is called the Interest Coverage Ratio. The lower the ratio the higher the burden of debt is on a company. The ratio for the Application Software Industry is 25.50. ORCL embarrassingly shows up at 10.40! Wow can it pay its debts? This really worries us. As compared to its Industry, ORCL appears weaker financially on average.

Our Conclusion- this company is carrying a lot of debt. We give it an “D-”

Technical Analysis

Long Term Investing

ORCL has been steadily moving up until April of 2010. May brought the stock down and it spent all of June moving sideways, not giving us any indication of where it might be going. It has kicked off July fairly well, but we shall see if it get’s above the trading zone it has established for itself.

With a BETA of .96, it has been mimicking the market fairly well.

After going up for a whole year, ORCL might be headed down with the rest of the market. Since it has
mimicked the markets so well and we are in a a bearish turn, it might be safe to conclude that ORCL is headed in the same direction.

Short Term

With a well established trading zone here, we would expect this to go a little longer or finish its rest and continue down with the markets. We are not bullish on this stock presently but it may not be unreasonable to say the stock can move up and down in 2 to 3 week intervals. It is in a tight trading zone right now, but we do not believe it will stay there. Watch as it moves, it could define a much larger zone to trade in.

Resistance- we’re looking at out first level of resistance at about 23.66 This is the last high it touched. After this we are moving up to about the 25 level. We would not be surprised if the stock rose up to 25 or even a little higher. But we do not expect it to challenge the March 2010 highs right now.  

Support- If we do have a downward movement, look at a possible resting place of 21.32. This is pretty strong; if we move farther then we are looking at 20 as the next point of support. Do not be surprised if the stock spends a few months moving between the 20 to 25 levels.  

Opportunity

We are not bullish on this stock. We would have to lean more toward the bearish levels than anything since the sentiment of the markets as a whole lean this way. We do not like the debt load ORCL carries if we are thinking short term trade. The best opportunity we can find here is look to design a strategy within a trading zone and look for the bounces off the moving averages. The 200 day MA has been established recently as the resistance area that the stock refuses to move through. With the recent 50 day cross over, now we will see whether the 50 day MA becomes the line of resistance. If this happens, and is confirmed with another touch and bounce, then we have a very strong bearish move.

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