Halloween Treat: Oracle

There are some universal truths among the Silicon Valley set. Striking it rich with options is an entitlement. Ten-hour days are for wimps. The company gym should be next to the company cafeteria. Microsoft (Nasdaq: MSFT  ) chairman Bill Gates is the devil. And Oracle (Nasdaq: ORCL  ) CEO Larry Ellison is the boogeyman.

Indeed, Ellison has for years been painted as the Valley's uber-brat. It didn't help when he admitted to hiring agents to dig through Mr. Softy's trash. But that's just Larry being Larry. Don't be fooled by the creepy veneer. The truth is Ellison is no boogeyman. In fact, he may be one of the smartest, most determined managers in business.

Maybe a serial killer instead
That's not to say the he hasn't at times acted the part of the ax-wielding madman chasing impudent teens on a stormy weekend retreat by the lake. He's boldly proclaimed his intent to kill his competition more than once. Witness last year's feud with former protege Craig Conway in the battle to win PeopleSoft.

His employees are also prone to brashness when it comes to rivals. Take Salesforce.com (NYSE: CRM  ) , for example. Recently, Oracle president Charles Phillips said that it would be fun to "crush" the junior maker of applications software.

But who am I, or you, to say this brashness isn't merited? Didn't Oracle win its bout with PeopleSoft? Wasn't Conway fired in the process? And hasn't Ellison publicly battled Siebel (Nasdaq: SEBL  ) founder Tom Siebel for years only to ink a $5.8 billion deal to acquire his company last month? I don't have to spell it out, do I? Larry is a winner. He's proven it over and over again.

Wannamake a deal?
I think Ellison is scary in the same way that Donald Trump is. The exterior is just puffery that distracts from the fact that both have made a living brokering deals. And Ellison's recent triumphs have had a real impact. Take PeopleSoft, for example.

Yeah, I know both analysts and investors alike pooh-poohed Oracle's results from the first quarter -- released a little less than a month ago -- because year-over-year license revenue growth in the core database business was minimal. But applications software licenses doubled over the same period. Free cash flow spiked, too, and appears on pace to exceed $5 billion during fiscal 2006.

No haunted house here
Oracle isn't your typical rickety haunted house, either. Indeed, the database king has slain more than $7 billion in debt since March. Yet the latest balance sheet pegs net cash and investments at nearly $3 billion.

Of course, some critics will say this number is bound to decline again as Oracle takes on debt to finance the Siebel acquisition. Well, they should also point out that debt is usually cheaper than equity, and Oracle churns out so much cash that buying leverage could generate excess returns on capital without diluting my interests. As long as the acquisition makes sense strategically, adding debt may not be a problem.

Behind the trap door
Forget the scary stories and run the numbers. That's what I did. According to my review of the past four quarters of earnings reports, Oracle's free cash flow comes in at $3.255 billion. The firm had 5.241 billion shares outstanding as of the most recent quarter. That almost gives us enough to get started on a discounted cash flow analysis.

We'll need growth estimates, too. I'd prefer to use 20% for the next five years, because that's what Ellison is aiming for. Analysts, apparently, believe he's nuts. They've got Oracle's five-year growth rate at 11%. But these are also the same geniuses that thought he'd never win PeopleSoft.

Maybe they're both wrong, so let's split the difference (admittedly an aggressive assumption). Plugging in 16% growth to 2010, 8% for the next five years after that, and 4% ongoing at a 12% discount rate yields a fair value of $15 per stub using the DCF calculator available to subscribers to Motley Fool Inside Value. Oracle's not only a tasty treat, it's a cheap one, too.

A monster ... for your portfolio
You can look at Ellison as the villain if you want. I don't care. In fact, I think it's better for me if you do. I'm looking to buy more shares, and so long as the Larry-as-boogeyman myth persists, I'll have buying opportunities. And so will you. Happy Halloween!

Does your portfolio feature a few stock market zombies? Banish them for good. Get help from any of our investing newsletters. Like a choco-licious Halloween treat, you can try any of them risk-free.

Fool contributor Tim Beyers just isn't a chocolate kind of guy, except for Kit Kat bars. Mmmmmmm. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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