We hear all the time from the business media and pundits that the world is currently enduring one of the worst economies since the Great Depression. This recession, which started in December of 2007, will likely become the longest since World War II. However, great companies use lean times to catapult themselves to greater market dominance when better times return. Think of the success of Proctor & Gamble (PG) during the Great Depression, when it increased advertising budgets in the face of economic hardship because, after all, people still needed soap no matter how bad the economy. More recently, Google (GOOG) used the bursting of the tech stock bubble as a spring-board by hiring the best programmers from companies that were failing. Oracle (ORCL)has quietly been using the economic crisis to its advantage; the Wall Street Journal reports that the company has recently bought ten small software companies for a meager sum of just $750 million.
Oracle’s plan is to create software solutions for various industries, which contrasts with that of its main competitor, Germany’s SAP (SAP) which has a one-size-fits-all solution that is customized to meet specific needs. Thus Oracle has been buying a lot of the best-of-breed software designers for specific industries: insurance, plan-o-grams for retailers, social services, and human-resources to name a few. Oracle hopes that by buying companies with established or up-and-coming products, it will be able to offer a better solution to companies which often build their own software like Allstate Insurance (ALL). In a quote from the WSJ:
“…Oracle bought AdminServer Inc., a Chester, Pa., start-up that helps manage the policies insurers write. It paid less than $150 million for Skywire, excluding debt and legal fees, and about $100 million for AdminServer, with some deferred payments, according to people familiar with the terms. The companies had revenue of $95 million and $40 million, respectively, in 2007. Some insurers are taking notice. “When I saw those acquisitions, we called them [Oracle] and said, ‘There could be business in the future for you,’” says Catherine Brune, chief information officer of Allstate Corp., the Northbrook, Ill., insurance giant. Currently, Allstate develops its own software but is interested in other options. Ms. Brune plans to wait to see how Oracle’s full package of insurance-related software shapes up.”
Oracle’s intervention has afforded many of these companies the opportunity to survive, as capital is extremely hard to come by with the credit markets so tight and the IPO option virtually off the table in this market. The WSJ reports that one acquired company even needed a capital infusion to stay afloat during its talks with Oracle. There is no doubt that in a more normal marketplace these companies would be worth many times the price Oracle is paying. Oracle is one of the solid companies that has grown revenue very rapidly and has more than $7 billion in cash on hand. Thus, its buying spree for more distressed software firms may not be over.
As for Oracle’s stock valuation, Ockham has viewed Oracle as Undervalued ever since the company’s stock declined rapidly in the market chaos of last fall. The company’s aforementioned sales growth has been very impressive as revenue has more than doubled from five years ago. Oracle is now trading at around $17 per share which makes the price-to-sales 3.5x, whereas over the last ten years this metric has ranged between 4.1x and 8.7x. Price-to-cash flow is even further below its historical norm, as it currently stands at 9.7x but has historically ranged between 14.1x and 28.9x. While business IT spending has been reduced drastically in this down-turn, thus far, Oracle has stayed profitable with its most recent quarterly net income down only one percent from a year ago and current-quarter consensus estimates for earnings forecast a 6.7% gain. At Ockham, we love to profile companies that are making strides to strengthen in midst of recession. With its recent acquisitions we see a lot of reasons to believe that when IT spending returns to more normal levels, Oracle will be one of the chief beneficiaries.