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Oracle pushes aside the doubters
The software company posts strong quarterly results, showing that it was right to pursue PeopleSoft. The stock could climb above $16.
By Robert Walberg
Larry Ellison, Oracle's brash but brilliant CEO, has plenty to crow about after Wednesday's earnings report. His controversial decision to engage in a hostile takeover of PeopleSoft appears to have been a wise one, as surprising strength in the applications business helped Oracle deliver better-than-expected fiscal fourth-quarter earnings. In the first full quarter after the integration of PeopleSoft, applications revenues surged 52% to $350 million, well above the loose consensus forecast of $305 million.
The company also saw continued strength in its core database business, which posted year-over-year sales growth of 16% to $1.26 billion. According to Ellison, Oracle continued to steal database share from IBM (IBM, news, msgs). Services revenues were up an impressive 35% to $755 million, as well. Basically, the company enjoyed strong growth across the board.
More importantly, at least as far as Wall Street is concerned, Oracle sounded upbeat about its future. Management put fiscal 2006 earnings at 78 to 81 cents a share on sales of $14.2 billion to $14.4 billion. The current consensus forecast is for earnings of 78 cents a share on sales of $14.24 billion. Look for the consensus figures to start climbing in the days ahead as Wall Street begins to raise its targets in response to the companys strong business conditions. Nothing moves a stock like a steady diet of earnings and ratings upgrades.
Room to run
Considering that Oracle's stock entered Wednesday's session trading at $12.83, or 16.4 times the low-end of the company's forecasted fiscal 2006 earnings, there should be plenty of room for it to run. With concerns over the integration of PeopleSoft now laid to rest, Oracle should see its multiple move up toward the group average of 23.4. Assuming a somewhat conservative P/E ratio of 20, the stock has upside to the $15.60 to $16.20 range, or 22% to 26% above Tuesday's closing price.
One factor that's likely to keep Oracle from attaining a premium multiple to the group -- even though its operating profit margins, return on equity and return on assets are among the industry's best -- is the fear of additional acquisitions. Ellison hasn't been shy about his belief that in order to compete and win in the ever shrinking software industry, Oracle needs to be aggressive in growing its business through strategically targeted acquisitions.
Though future deals aren't unlikely to be as big as the long and often hostile takeover of PeopleSoft, with nearly $3.9 billion in cash, Oracle has plenty of ammo for the hunt. As I suggested in my Street Patrol article on Oracle in March, BEA Systems (BEAS, news, msgs) and/or Hyperion Solutions (HYSL, news, msgs) are two possible targets. Two more names often mentioned as potential Oracle targets are Siebel Systems (SEBL, news, msgs) and Business Objects (BOBJ, news, msgs). Given the relative ease in integrating PeopleSoft, don't be surprised if Oracle goes after one of these companies sooner rather than later.
Against conventional thinking
The Street won't like it if Oracle launches another takeover bid, but how can you argue with Ellison when he continues to come out on top time and time again? It might not be conventional thinking, but Ellison and Oracle didn't get to be where they are today by following convention. All signs, including the recent addition of hard-charging Gregory Maffei as chief financial officer -- point to another relatively high profile deal within the next 12 months.
Any such deal is likely to be highly criticized and cap the stock's short-term upside potential, but if future deals work out as well as PeopleSoft, Oracle will end up a much stronger company over the long term. And creating long-term shareholder value should be the goal of management teams everywhere.
Selling Google
One stock having no trouble creating shareholder value these days is Google (GOOG, news, msgs). The stock has rallied sharply over the past few months, and while I will probably regret this move, I'm removing the stock from my portfolio as of today's close. While I expect the company to deliver another blowout quarter (and probable stock split) when it reports results in a few weeks, the stock hit my target of $300 . And at current levels, the risks seem as great as the potential rewards, so I'll cash out and move to the sidelines.
At the time of publication, Robert Walberg neither owned nor controlled shares in any equities mentioned in this column.
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