This article is going to look at Oracle Corp (ORCL) through the lens of FAST Graphs™ - fundamentals analyzer software tool - which at this time shows a picture of a company that is currently undervalued. Oracle initiated dividends in 2008. This might be a great time for the dividend and growth investor to do further due diligence on Oracle.
About Oracle Corp: Directly from Google Finance
"Oracle Corporation, incorporated in 2005, is an enterprise software company. The Company develops, manufactures, markets, distributes and services database and middleware software, applications software and hardware systems, consisting primarily of computer server and storage products. It operates in three segments: software, hardware systems and services."
Earnings Determine Market Price: The following earnings and price correlated FAST Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.
Earnings & Price Correlated Fundamentals-at-a-Glance
A quick glance at the historical earnings and price correlated FAST Graphs™ on Oracle Corp shows a slight picture of undervaluation based upon the historical earnings growth rate of 18.4% and a current PE of 14.4. However, analysts are forecasting the earnings growth to continue at about 12%, and when you look at the forecasting graph below, the stock appears at value, (it's inside of the value corridor of the five orange lines - based on future growth).
Oracle Corp: Historical Earnings, Price, Dividends and Normal PE Since 1999
Performance Table Oracle Corp
The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return; capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.
When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 11.3% capital appreciation (green circle), long-term shareholders of Oracle Corp, assuming an initial investment of $1,000, would have received an additional $105.75 in dividends (blue highlighting) that increased their total return from 11.3% to 11.5% per annum versus 1.3% (red circle) in the S&P 500.
The following graph plots the historical PE ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 1999.
A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for Oracle Corp is 4.12 which is historically low.
Looking to the Future
Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:
The rate of change (growth rate) of the company's earnings
The price or valuation you pay to buy those earnings
Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.
The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.
The consensus of 37 leading analysts reporting to Capital IQ forecast Oracle Corp's long-term earnings growth at 12% (orange circle). Oracle Corp has low long-term debt at 23% of capital (red circle). Oracle Corp is currently trading at a P/E of 14.4, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Oracle Corp's True Worth™ valuation would be $61.54 at the end of 2018 (brown circle on EYE Chart), which would be a 13.2% annual rate of return from the current price (yellow highlighting).
Earnings Yield Estimates
Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Oracle Corp to an equal investment in 10 year Treasury bonds, illustrates that Oracle Corp's expected earnings would be 8.2 (purple circle) times that of the 10 Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.
Summary & Conclusions
This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although, with just a quick glance you can know a lot about the company, it's imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.
Disclosure: No Positions at the time of writing.