Here is a look at how Oracle (ORCL) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor:
Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?) :
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 5/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
Valuation Summary (Explanation of the ModernGraham Valuation Model)
Key Data:
| MG Value | $82.95 |
| MG Opinion | Undervalued |
| Value Based on 3% Growth | $31.24 |
| Value Based on 0% Growth | $18.31 |
| Market Implied Growth Rate | 4.19% |
| Net Current Asset Value (NCAV) | $0.57 |
| PEmg | 16.88 |
| Current Ratio | 3.38 |
| PB Ratio | 3.76 |
Balance Sheet - 11/30/2013
| Current Assets | $44,252,000,000 |
| Current Liabilities | $13,110,000,000 |
| Total Debt | $22,641,000,000 |
| Total Assets | $85,238,000,000 |
| Intangible Assets | $34,790,000,000 |
| Total Liabilities | $41,675,000,000 |
| Outstanding Shares | 4,506,000,000 |
Earnings Per Share
| 2014 (estimate) | $2.57 |
| 2013 | $2.26 |
| 2012 | $1.96 |
| 2011 | $1.67 |
| 2010 | $1.21 |
| 2009 | $1.09 |
| 2008 | $1.06 |
| 2007 | $0.81 |
| 2006 | $0.64 |
| 2005 | $0.55 |
| 2004 | $0.50 |
| 2003 | $0.43 |
Earnings Per Share - Modern Graham
| 2014 (estimate) | $2.15 |
| 2013 | $1.84 |
| 2012 | $1.56 |
| 2011 | $1.29 |
| 2010 | $1.06 |
| 2009 | $0.93 |
Conclusion:
Oracle Corporation is a company that has displayed strong and consistent earnings growth, and passes the majority of the requirements of both the Defensive Investor and the Enterprising Investor. The company does not qualify for the Defensive Investor, however, because it is currently trading at a high PB ratio and it has not paid a dividend long enough. The Enterprising Investor is not as picky and Oracle passes all five of the investor type's requirements. As a result, Enterprising Investors should feel comfortable proceeding with further research into whether Oracle would be suitable for their individual portfolios. One example of further research would be to review the ModernGraham Valuation of International Business Machines (IBM) and the ModernGraham Valuation of Microsoft (MSFT). From a valuation perspective, the company's strong growth of EPSmg from $0.93 in 2009 to an estimated $2.15 for 2014 results in a very favorable result through the ModernGraham valuation model. The market is currently implying a growth estimate of 4.19%, but Oracle has easily grown faster than that over the historical period we've reviewed, and would therefore appear to be undervalued at this time.
What do you think? Do you agree that Oracle Corporation is undervalued? Is the company suitable only for Enterprising Investors?
Disclosure: The author did not hold a position in Oracle Corporation (ORCL) at the time of publication and had no intention of entering into a position within the next 72 hours.
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