BMO Capital Markets analysts Joel P. Fishbein and Brett Fodero preview Oracle Corporation (NYSE:ORCL)’s 3Q 2014 earnings report.

Oracle

Oracle Corporation (NYSE:ORCL) is scheduled to report earnings today after the close. Comps ease in 2H and we expect results toward the top end of guidance. Our 3QFY14 revenue and EPS estimates stand at $9,392 billion/ $0.71 versus consensus $9,355 billion/ $0.70. We continue to like Oracle Corporation (NYSE:ORCL) for its defensive characteristics (recurring revenue, discount multiple, 8.9% FCF yield), and new product initiatives (Cloud, 12c, Systems).

Impact & Analysis

Sentiment has been improving following the 2QFY14 beat; however, shares continue to trade at a discount to peers and the market. Numbers appear to be set up well with the Street, modeling 5.6% new software license growth for 2HFY14 and comparison easing (-0.01% 2HFY13 growth). Inputs in the quarter suggest that traction with Fusion adoption may be slightly ahead of the consensus view, and the early read on the 12c Database cycle showing signs of long-term growth. 12c (launched June 2013) is not currently in numbers and likely won’t show traction until later this calendar year at the earliest. Hardware product revenue is expected to grow in 3Q as engineered systems continue to gain traction.

Valuation & Recommendation

Oracle Corporation (NYSE:ORCL) has bounced off through multiple valuations and still trades at a discount to the S&P 500 (15.8x CY2014E P/E), and at a 9% discount to its large-cap tech peer group despite its solid recurring revenue base, margin expansion, and huge customer installed base. Shares are yielding 8.9% on 2014 FCF and have a 2.0% dividend yield. Our $42 price target equates to 14.3x our FY2014 earnings estimate, below its 10-year historical mean multiple of 14.7x. We remain buyers of the shares.