Oracle’s Micros Buy To Improve EPS Even More Than Buyback

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Most analysts agree that a combination of Oracle Corporation (NYSE:ORCL) and MICROS Systems, Inc. (NASDAQ:MCRS) is one that’s good for both companies. Cantor Fitzgerald analysts highlight the benefits to Oracle’s vertical integration. Those at Sterne Agee estimated how the acquisition will probably raise Oracle’s earnings per share and found that the increase is actually greater than if the company bought back more shares.

How Oracle’s earnings benefit from Micros purchase

In a report dated June 24, 2014, Sterne Agee analysts Robert Breza and Jean-Baptiste Jouve said Oracle Corporation (NYSE:ORCL) is actually paying for growth in its revenue. They say it is slightly more accretive to Oracle’s earnings than a share buyback of the same amount, although it comes with more risk. In addition, they think it will help Oracle expand its margins.

In their estimates, if Oracle Corporation (NYSE:ORCL) bought back $4.6 billion worth of shares at around $41 per share over the next three months, their 2015 earnings estimate would increase from $2.14 to $3.18 per share. For the 2016 fiscal year, their estimate goes from $3.38 to $3.43 per share. They said with the purchase of MICROS Systems, Inc. (NASDAQ:MCRS), their 2015 estimate goes to $3.19 per share and their 2016 estimate goes to $3.46 per share.

Oracle improves margins

They also analyzed Oracle Corporation (NYSE:ORCL)’s margin expansion prospects. The company is paying $4.6 billion or $68 per share for MICROS Systems, Inc. (NASDAQ:MCRS). They note that Micros’ margin profile is “significantly lower” than Oracles, at 20%, compared to Oracle’s 47%. In addition, about 56% of Micros is non-recurring revenue. However, the Sterne Agee team thinks Oracle will increase Micros’ North American penetration, which makes up 43% of its revenues and also cross-sell ERP solutions while shifting the business mix to software from hardware and services.

The analysts estimate that Oracle Corporation (NYSE:ORCL)’s 2015 fiscal year revenue will be at $41.735 billion. The factored in 7% growth for growth at MICROS Systems, Inc. (NASDAQ:MCRS) and a 21% margin for the segment. The Sterne Agee team has a Neutral rating and $41 per share price target on Oracle.

Oracle expands into hospitality segment

In a separate report dated June 23, 2014, Cantor Fitzgerald analyst Brian White said the deal with MICROS Systems, Inc. (NASDAQ:MCRS) “dovetails” with Oracle Corporation (NYSE:ORCL)’s “vertical push into retail.” As others have said, White noted that by purchasing Micros, Oracles moves into the retail and hospitality industries, as the company makes software for them. He believes the acquisistion gives Oracle a “healthy market opportunity.”

MICROS Systems, Inc. (NASDAQ:MCRS) estimates that its total available market is about $14.1 billion and that it has about a 9.4% share of the market. The company generated $1.27 billion in revenue in the 2013 fiscal year, which ended June 30, 2013. White believes Oracle Corporation (NYSE:ORCL) will be a major cloud “consolidator” and that it supports the company’s focus on certain verticals. Oracle has said in the past that it wants to become a top supplier in certain verticals, including retail, telecom and financial services.

White has a Buy rating and $50 per share price target on Oracle Corporation (NYSE:ORCL).

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