Following its earnings call yesterday Oracle Corporation (NYSE:ORCL) stock is trading downward as of the writing of this post. However shares of its competitor Adobe Systems Incorporated (NASDAQ:ADBE)soared earlier this week following its earnings release. Our earnings analysis of these two stocks suggests that Oracle might be faced with declining growth while Adobe could be a turnaround story. We compare these companies to their competitors (see the end of this post for the peer list we used) and address questions around valuation drivers, growth and investment strategy. This post focuses on Oracle Corporation. For a full transcript see: Oracle Corporation (ORCL) Q1 2014 earnings discussion. We will shortly publish an earnings analysis of Adobe Systems Incorporated as well; subscribe to our blog (top right of this page) to receive the report via email.

Oracle has paid out dividends of nearly $1.7 billion in the last 12 months… nearly 90% of free cash flow! Could the company be justified in increasing dividends even further? Find out with this Free Likely Corporate Actions Report

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Oracle Corporation Earnings Analysis

The table below shows the preliminary results along with the recent trend for revenues, net income and returns for Oracle Corporation (ORCL) for the quarter ended 2013-08-31.

Quarterly (USD million) 2013-08-31 2013-05-31 2013-02-28 2012-11-30 2012-08-31
Revenues 8,372.0 10,947.0 8,958.0 9,094.0 8,181.0
Revenue Growth % (23.5) 22.2 (1.5) 11.2 (25.1)
Net Income 2,191.0 3,806.0 2,504.0 2,581.0 2,034.0
Net Income Growth % (42.4) 52.0 (3.0) 26.9 (41.1)
Net Margin % 26.2 34.8 28.0 28.4 24.9
ROE % (Annualized) 19.8 34.6 23.2 23.9 18.7
ROA % (Annualized) 10.4 18.9 12.6 13.2 10.5

ORCL: Burdened by Asset Inefficiency?

Oracle Corporation’s current Price/Book of 3.6 is about median in its peer group. The market expects less growth from ORCL than the median of its chosen peers (PE of 14.6 compared to peer median of 23.2) and for its current rates of return that are around peer median (ROE of 25.4%) to decline.

The company’s relatively high profit margins (currently 29.7% vs. peer median of 19.7%) are burdened by asset inefficiency with asset turns of 0.5x compared to the peer median of 0.6x. Overall, this suggests amargin driven operating model relative to its peers. Oracle’s net margin is its highest relative to the last four years and compares to a low of 22.9% in 2010.

Long-term Growth Fading?

While Oracle Corporation’s revenues growth has been around the peer median (11.5% vs. 11.5% respectively for the past three years), the stock’s below peer median PE ratio of 14.6 implies below median long-term growth as well. The market likely sees the company’s long-term growth prospects to befading.

The company’s annualized rate of change in capital of 11.6% over the past three years is around its peer median of 11.6%. This median investment has likewise generated a peer median return on capital of 17.3% averaged over the same three years. This median return on investment implies that company is investing appropriately.

ORCL Trend Charts

Quarterly Revenue Trend for Oracle Corp (NYSE:ORCL)Annual Revenue Trend for Oracle Corp (NYSE:ORCL)

Peers Used for Analysis

We compared the following companies for our peer-based analysis today: Oracle Corporation (NYSE:ORCL) Adobe Systems Incorporated (NASDAQ:ADBE), SAP AG Sponsored ADR (NYSE:SAP), Intuit Inc. (NASDAQ:INTU) and Microsoft Corporation (NASDAQ:MSFT).

Oracle has paid out dividends of nearly $1.7 billion in the last 12 months… nearly 90% of free cash flow! Could the company be justified in increasing dividends even further? Find out with this Free Likely Corporate Actions Report

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