Wednesday, September 12, 2012

The New Name

On June 2nd I wrote here about a new holding that I've been adding to my portfolio. Well, the winner is Oracle Corporation (ORCL), a large cap U.S. based technology company. Large cap tech stocks have been out of favour for some time, even though their fundamentals have held up reasonably well during this sluggish economic recovery. Without boring you - I hope - I'll touch on a few key points about ORCL.

Oracle is a giant in database software business. They control roughly 60% of the global dbase market.
What's great about Oracle and others in the business ( like IBM and SAP ) is that when you purchase their database, you generally purchase a long-term service contract with the product. So, as a customer you are tied to their products for the long-pull. As you use their database, and build reams of very important data, you are less likely to want to switch database providers and risk data loss. A major data loss could be devastating to your business. So - Oracle's customers are sticky - that's good. Some 43% of ORCL's revenue comes from software licence updates and product support - all high margin business.

ORCL also sells some hardware (server and storage products), which is generally a low margin commodity business. They are scaling down this side of the business. They are also in the cloud computing business, which is a huge growth area going forward. SaaS, software-as-a-service, is the next platform for large companies.

Here's just a few numbers to outline why ORCL is a good business;

10yr revenue growth 12.5%
10yr earnings growth 18%

Net profit margins ( 5 yr avg ) 31.6%
Return on equity ( 5yr avg ) 28%
Cash per share $3.50/share ( net of debt)
Returning cash to shareholders: dividend: 0.24/share, share buy backs.
CEO: Larry Ellison owns 22.4% of the company - remember this is a $150 Billion company, his eye is on the ball - except for his recent purchase of a whole Hawaiian Island - hmmmm. If he buys England, I will really worry.

Overall, ORCL has a great track record with a good future, with great management, which early in June (@ $26.50), was all available for under 10X earnings. ORCL is conservatively worth $40-$45.

ORCL has moved up sharply, so don't run out and just buy ORCL. For a margin of safety ORCL is a buy in the high 20's.

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