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Oracle: Will It Beat Estimates Again?

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Oracle Releases Fourth-Quarter Fiscal Results

Justin Sullivan

Article Thesis

Oracle Corporation (NYSE:ORCL) will study its quarterly net results later this week. In this report, we'll look astatine what investors tin expect from nan company's report, and we'll besides delve into ORCL stock's outlook going forward.

Will Oracle Beat Earnings Estimates Again?

Oracle Corporation has a clear history of outperforming expectations. That tin beryllium seen successful nan pursuing screencap from Seeking Alpha's net page:

ORCL results

Seeking Alpha

Oracle has beaten gross estimates successful 10 retired of nan past 12 quarters, and nan aforesaid holds existent for net per stock estimates. The institution hit estimates connected some lines during nan astir caller quarter, which mightiness beryllium nan astir important metric, arsenic nan astir caller results should beryllium nan astir important ones.

Right now, analysts are predicting that Oracle will study revenues of $12.4 cardinal for its fiscal 3rd quarter, which would be up marginally connected a sequential basis, arsenic ORCL generated revenues of $12.3 cardinal for nan astir caller quarter. The quarter-to-quarter maturation complaint would frankincense beryllium astir 1%, which isn't bad but not great, either. On a year-over-year basis, Oracle's maturation will beryllium overmuch stronger, but that will, astatine slightest partially, beryllium driven by M&A. Relative to nan erstwhile year's quarter, nan expected top-line number implies a maturation complaint of astir 19%, which is comparatively successful statement pinch nan reported maturation for nan erstwhile 2 quarters, erstwhile nan takeover of Cerner had a ample effect connected ORCL's reported maturation arsenic well.

Looking astatine nan bottommost line, Oracle Corporation is forecasted to study net per stock of $1.20, which would beryllium down marginally from nan erstwhile quarter. If Oracle continues to hit estimates, arsenic it has done astir of nan clip complete nan past mates of years, existent results could beryllium better, however. That could make sense, arsenic revenues are expected to turn connected a sequential ground arsenic well. On apical of that, 2 different factors could thrust profitability connected a per-share ground compared to nan erstwhile quarter.

First, Oracle's takeover of Cerner will spell manus successful manus pinch nan capturing of synergies. Over time, much and much synergies should get captured, frankincense costs mightiness person declined sequentially. Second, Oracle is an avid repurchaser of its ain communal shares, frankincense nan stock count apt has declined compared to nan erstwhile quarter. All other equal, this should supply a mini boost to its net per stock growth. I frankincense judge that location is simply a bully chance that Oracle will hit estimates again erstwhile it reports its third-quarter net results, though location is, of course, nary guarantee for that.

What other should investors support an oculus connected erstwhile Oracle reports its quarterly results? There are a mates of noteworthy items, I believe.

First, since we are successful a rising liking complaint situation wherever indebtedness becomes much costly complete clip arsenic lower-yielding indebtedness is being refinanced. In an situation for illustration this, paying down indebtedness makes sense, arsenic it results successful little liking expenses, each other equal. This, successful turn, increases a company's nett profits and frankincense besides its net per stock complete time.

Looking astatine Oracle's astir caller 10-Q filing, we spot nan following:

ORCL equilibrium sheet

ORCL 10-Q

Oracle's rate position, including equivalents, totaled $7 cardinal astatine nan extremity of nan astir caller quarter. At nan aforesaid time, Oracle's indebtedness position totaled $91 billion, which makes for an $84 cardinal nett indebtedness position. That's rather sizeable successful absolute terms, though it makes consciousness to spot indebtedness successful position to different metrics, specified arsenic EBITDA aliases rate flow.

Oracle is expected to make EBITDA of $22.4 cardinal this year. That makes for a nett indebtedness to EBITDA ratio of astir 3.8, which is not ultra-high but still alternatively elevated. Especially successful a rising rates environment, little leverage would beryllium a bully thing. I frankincense expect that Oracle will salary down immoderate indebtedness successful nan coming quarters and years. Luckily, nan institution should person nan rate travel that is required to do so. During nan past 2 quarters, i.e. since nan opening of nan existent fiscal year, Oracle has generated operating rate flows of $7.2 billion, aliases $3.6 cardinal per 4th (or much than $14 cardinal annualized). Somewhat seasonal patterns propose that yearly rate flows could beryllium moreover higher -- they besides were successful nan erstwhile fiscal year, moreover though nan Cerner acquisition had little of an effect there.

When we relationship for superior expenditures, Oracle should still person astir $8 cardinal to $9 cardinal successful free rate near over. Around $3.5 cardinal of that is needed for Oracle's dividend, assuming nan dividend will enactment astatine nan existent level. Thus Oracle has astir $5 cardinal successful leftover rate that it tin allocate betwixt buybacks and indebtedness reduction. The institution can't drastically little its nett indebtedness successful nan foreseeable early pinch this level of rate generation, but indebtedness tin still beryllium reduced complete time. On apical of that, Oracle's leverage ratio should besides shrink owed to EBITDA maturation -- pinch ORCL being forecasted to turn its EBITDA by 13% adjacent year, that unsocial will shrink nan nett indebtedness to EBITDA ratio to 3.3, moreover earlier immoderate rate travel being allocated to reducing nan indebtedness position successful absolute terms. Between absolute indebtedness simplification owed to rate being allocated to that and EBITDA maturation astatine nan aforesaid time, Oracle's leverage ratio should diminution meaningfully complete nan adjacent mates of years -- if guidance decides that this is what nan institution should pursue.

Outlook Is Solid

With much than $12 cardinal being expected for Oracle's gross for nan quarter, nan institution should beryllium good connected its measurement to breaching nan $50 cardinal gross milestone this year. That target has been shown successful a caller investor presentation:

ORCL

Oracle presentation

While this maturation is partially driven by M&A, including nan caller Cerner takeover, Oracle is besides increasing organically. Oracle's unreality business has been a driver here, arsenic nan institution is pursuing to go a azygous root of endeavor exertion needs -- astatine slightest that's a stated goal. And since Oracle is progressive successful a wide array of services, including storage, computing, databases, security, and truthful on, nan imagination to go a one-stop shop makes sense, moreover if it whitethorn not activity retired perfectly. There's sizeable maturation imaginable successful nan unreality computing space, and Oracle should beryllium 1 of nan companies that use from said marketplace maturation complete nan coming years. Between that, nan capturing of synergies, separator description efforts, immoderate imaginable indebtedness simplification (which could consequence successful little liking expenses), and buybacks that thrust net per stock growth, Oracle is expected to turn its profit astatine a low-teens complaint complete nan adjacent mates of years, though nan existent twelvemonth will beryllium a twelvemonth of almost nary net per stock growth, according to nan expert community:

ORCL EPS growth

Seeking Alpha

While location is nary guarantee that Oracle will present this benignant of net per stock growth, nan way grounds of outperforming expectations bodes good for nan future. Even if Oracle were to present a precocious azygous digits net per stock maturation complaint successful nan adjacent 4 years, versus nan forecasted 12% maturation beyond nan existent year, that would still make for a fundamentally very sound performance.

Valuations should beryllium considered arsenic well, and here, Oracle doesn't look arsenic bully anymore. Oracle has seen its shares emergence by 21% complete nan past year, while nan wide marketplace pulled back. This has made ORCL much expensive, and nan institution is now weighted astatine much than 18x nett profits. Since nan wide marketplace is trading astatine an net aggregate of astir 17, 1 tin reason that ORCL is not a awesome worth correct here. It was importantly much charismatic erstwhile shares traded astatine conscionable supra $60 past twelvemonth -- nan net aggregate was conscionable 12 astatine that time. Likewise, nan dividend output has declined arsenic good owed to Oracle's beardown stock value capacity successful nan caller past. With shares offering a dividend output of 1.4% today, they are a considerably weaker income finance compared to past year, erstwhile nan dividend output was arsenic precocious arsenic 2% -- which was supra nan wide market's yield, while nan existent dividend output is beneath what 1 tin get from nan wide market.

Takeaway

Oracle has a history of beating estimates, and nan aforesaid could clasp existent erstwhile ORCL reports its quarterly results later this week. After all, expert estimates look rather blimpish -- nan capturing of synergies could let ORCL to outperform expectations.

The longer-term outlook is solid, but owed to a somewhat elevated valuation, I do not see Oracle a bargain astatine existent prices -- it could salary disconnected to hold for a amended buying opportunity, arsenic shares do not look for illustration a awesome worth astatine much than 18x nett profits.

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Editor: Naga



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