Pulled the CIBC-Oppenheimer Report off the message board at Yahoo. (Sorry, it's a bit scrambled up.)
Doughboy.
-- OP: ORCL: Downgrade to HOLD Based on Valuation. P1-2 --
CIBC Oppenheimer (M. Eisenstat 212-667-4665) ORCL
Part 1 of 2
CIBC Oppenheimer
November 6, 1998
Enterprise Software Oracle Corporation
Melissa Eisenstat (212) 667-4665 Downgrade to HOLD Based on
Edward McCabe (212) 667-6430 Valuation.
Scott Phillips (212) 667-4451
Investment Conclusion
UNEDITED: In the interest of timeliness, Rating: HOLD
this report has been made available to our ORCL-OTC(11/5/98) $31 13/16
customers before editing has been completed. 52-week $37 3/4-17 5/8
It will be replaced with an edited version Shares Out 989 Million
shortly. Float 771 Million Shares
We are downgrading Oracle to Hold from Buy Market Cap $31 Billion
because the stock has exceeded our $29 price Div/Yield Nil/Nil
target, making it fully valued at current Fiscal Year May
levels, in our opinion. Book Value $3.11 per Share
FY 1999E ROE 27.5%
While we believe the business fundamentals LT Debt $304 Million
remain solid, we do not think there is Preferred Nil
significant upside to our estimates or Com Equity $3.1 Billion
growth rate assumptions going forward that
could prompt us to raise our target price or
multiple.
Earnings per Share
We think buzz about next week's release of FY 1998 $0.96
SQL Server 7.0 by Microsoft is likely to FY 1999E $1.22
prevent Oracle's stock from appreciating FY 2000E $1.49
much further. We believe, however, that
Microsoft's product is still unlikely to P/E Ratio
challenge Oracle at the high end of the FY 1998 33.1X
database market. FY 1999E 26.1X
FY 2000E 21.4X
We believe 2-3 year growth rate for Oracle
is in the low 20% area and that farther out,
the growth rate is around 20%. Applying a
multiple in line with that growth rate to
our FY 2000 (FYE: May) estimate results in a Company Description:
price around $30, which is roughly where the Oracle is the second largest
stock is trading. software company. It dominates
the enterprise software
industry, selling a broad range
of products including databases,
tools and applications.
Our investment thesis when we upgraded the stock
We upgraded the stock following the company's 1Q99 earnings conference call in
September because the database and services businesses, which have been core
areas for Oracle, showed faster growth than we expected. Specifically, these
two areas of the business grew 17% and 39% respectively vs. our forecast for
10% and 31%. We believed the faster growth demonstrated that quarter was
sustainable for the following reasons:
Based on the company's leadership position at the high end of the database
industry and the wider adoption of Oracle8 by customers, we believed that
faster, steadier database growth was feasible going forward. We thus raised
our database growth assumptions to 10% and 11% over the next two years from
our previous 9% and 6%.
In the services area, we believe revenues are being fueled by applications
implementations as customers upgrade non Y2K compliant versions of Oracle
applications. Given that just a year ago, less than 50% of the installed base
was upgraded, we think time pressure is accelerating the revenue growth in
this area. We raised our services growth rate in FY 1999 to 38% from 34% and
shaved our assumption for FY 2000 to 30% from 31%.
Why we are downgrading the stock
We don't see much upside to our estimates
While we believe the company is on track to meet our earnings estimates, we do
not believe there is significant upside from current levels. Indeed, at $1.22
and $1.49 for FY 1999-2000, we are above the consensus estimates of $1.20 and
$1.45. In order to maintain our Buy rating, we would have to see potentially
faster growth in one of the company's revenue streams. However, in examining
our growth rates for databases and services mentioned above, as well as our
applications growth rates of 15% and 20% in FY 1999-2000, we do not believe
there is much upside to our estimates.
Increasing competition from Microsoft
In addition, the advent of Microsoft's SQL Server 7.0 release suggests that
competition will increase going forward. We believe this could put pressure
on Oracle's database growth, or at the very least, could limit upside to our
forecast. While we do not expect Microsoft to threaten Oracle at the high end
of the market, we do think it will pose a threat to Oracle's emerging
mid-market business. |
