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Oracle for the Long Haul
by Tom Gardner (TomGardner@aol.com)

ALEXANDRIA, VA, (June 17, 1997)/FOOLWIRE/ -- So Oracle announced 4th quarter earnings today, did they?

I look forward to studying them. I haven't had the time to look them over yet, but I assume the company put up 30-35% growth in sales and earnings over the same period last year. Oracle certainly posted double-digit margins. And their conference call will probably reveal powerful optimism about the company's future in a digital world that demands a significantly speedier and more artful management of data than ever before.

It's a demand that will grow exponentially over the next twenty years, so long as Nostradamus was wrong.

No, I haven't seen the earnings report yet, but I assume it'll play out like that. I don't mean to be too, too cavalier about it all. And I'm taking only a very small risk here, betting that Oracle will post a healthy quarter. That's because past performance is some sort of indicator of future results. Oracle has been an awesome company, posting consistent and broad sales and earnings growth over the past five years.

This is a radically different company than the one which battled through The Troubles in 1991. Back then, Oracle was booking sales it shouldn't have been. Investors who watched accounts receivable outpace income growth started wondering just what in the heck "sales" and "earnings" meant. Not much, in that environment. After all, I can sell you this article for $1,000 per copy, charge you nothing, call it $1,000 in sales and $500 in earnings, see my stock climb, and never have turned even a penny of profit. Oracle wasn't selling Fool Portfolio reports for a thousand bucks, but the underlying principle was the same.

Oracle's selling got way ahead of its serving.

Then enter from the right side, Ray Lane -- from the management-consulting firm Booz, Allen and Hamilton. Lane brought performance standards, tighter quantification, and an attentiveness to the bottom line. Each of these qualities neatly integrated with CEO Larry Ellison's marketing talents, his flair for things extraordinary and sometimes absurd. They played ping pong -- the spirit of an Ellison idea merging with Lane's hard performance numbers; reality meeting imagination.

Since the close of 1991, Oracle's stock has risen from a split-adjusted price of $3 per share to its pre-earnings perch of $52 per share today. That totes up to a growth rate of 68% per year. $10,000 invested in Oracle stock just 5 1/2 years ago is valued at over $170,000 today. If you're sitting on those gains, even if you're sitting on just the stock's 37% returns over the past year, I think you'd be unwise to look at today's earnings report and care too much about it, one way or t'other. It should take more than a quarter to rock you out of your position.

Going into the report, Oracle is showing the following underlying financial strength:

Sales $5.2 billion
Earnings $1.1 billion
Profit Margins 21.2%

Cash $1.0 billion
Long-Term Debt $300 million
Flow Ratio 1.14 **

** The Flow Ratio is defined as: (current assets minus cash) / current liabilities. It's a measure of how well the company is managing the flow of its inventory & receivables relative to its payables. If you need further clarification on this, drop by the Cash-King folder on the Investor's Roundtable board on our Web site. A fellow named "Doubting Thomas" has been posting brilliantly there. **

The numbers show an extraordinarily sturdy business; the story tells of a company prepared to manage data at the outset of the Age of Information and Global Networking. Oracle wouldn't be here without Ray Lane's calculator, and it wouldn't be here without Ellison's flair.

Of course, there's no such thing as a sure thing -- as Jon Cusack learned in a movie. The unfortunate passengers on the Titanic lived that notion, when 1,500 people went to the bottom of the Atlantic on April 15, 1912. Every sound investment portfolio carries an oversupply of lifeboats... because when the market corrects with the ten-ton force of a tsunami or tears your hull like an iceberg, everyone heavily on margin, everyone without a lifeboat, everyone employing the sure-thing strategy is going to breath undertow for a long while.

Conversely, those not on margin, those investing, who have pounded into stocks only what they could afford to part with for years, dropping it exclusively into top-tier businesses -- their portfolios will snap back, with a vengeance. Finding top-tier businesses in a dearly-valued market is crucial.

Oracle looks like one such business.

- TG

Next: Jim Surowiecki on Oracle's unorthodox CEO

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