Call of the Day: Why Valuation Matters At Oracle (ORCL)

September 12, 2011 by Jon C. Ogg

This morning was looking rough for equities, but it wasn’t that way for Oracle Corporation (NASDAQ: ORCL).  It was when investors heard that Goldman Sachs had added the stock to the prized Conviction Buy List that interest came in despite a weak market this morning.  Investors should know that Goldman resumed coverage back in mid-July with a “Buy” rating and a $40 target and that was after the prior day’s adjusted close was at $33.14.  The market sell-off was brutal and the stock never saw that price again.  In fact, it was down to $26.00 by last Friday’s close for a drop of more than 21%.

Still, this morning’s call was more of a call to arms.  It is what used to be called “Pounding the Table” by research firms on Wall Street.  This morning we did briefly see a drop despite this call with an official open of $25.94 and a low on the day of $25.90.  The reason the weakness was there at all is because this was a “valuation” call.  Every single value investor out there knows that value cannot be a catalyst on its own.

Still, as soon as the markets offered a sign of not dying, the buyers came in.  The interest faded during the trading day, but the rally toward the end of the day offered huge support.

Shares closed up 2.8% at $26.75 on Monday’s upgrade.  What is interesting is that the consensus price target is still up around $36.00 and the 52-week trading range is $24.38 to $36.50.  Yep, shares were down almost 30% from their highs.

The consensus estimate for Fiscal May 2012 is $2.40 EPS, which is still barely 11-times earnings for the coming year.  The stock also trades at just under 3.5-times expected sales. Thomson Reuters even shows an expected 10% earnings growth and 7% revenue growth for its Fiscal May 2013 estimates.

If any manager is a king at delivering, it is Larry Ellison.  The company has had hiccups before and no one will be able to find cover if a true recession comes back into play.  Still, this was a classic “Pounding the Table” call and it looks like traders paid attention even if the 37.2 million shares traded only compares to an average volume of close to 36.9 million shares.

JON C. OGG