Has Oracle Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Oracle (NYSE: ORCL  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Oracle.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

14.3%

Fail

 

1-Year Revenue Growth > 12%

1.2%

Fail

Margins

Gross Margin > 35%

79.3%

Pass

 

Net Margin > 15%

27.6%

Pass

Balance Sheet

Debt to Equity < 50%

33.8%

Pass

 

Current Ratio > 1.3

2.74

Pass

Opportunities

Return on Equity > 15%

23.9%

Pass

Valuation

Normalized P/E < 20

18.21

Pass

Dividends

Current Yield > 2%

0.8%

Fail

 

5-Year Dividend Growth > 10%

5.3%*

Fail

       
 

Total Score

 

6 out of 10

Source: S&P Capital IQ. Total score = number of passes. *3.5-year growth rate.

Since we looked at Oracle last year, the company has lost a point. Revenue growth slowed to a near standstill, but a 5% drop for the stock brought its earnings multiple down slightly.

As the technology space has changed, Oracle has had to transform itself. With its dominance in enterprise software, the company fended off rival SAP effectively in building a tech empire. Yet despite impressive margins on software sales, Oracle wasn't satisfied with that niche and broadened its exposure to add a more complete-package approach by buying Sun Microsystems. That move has put Oracle in the crosshairs of both IBM (NYSE: IBM  ) and Hewlett-Packard (NYSE: HPQ  ) , as all three companies have gone beyond their respective specialties to come into direct competition with each other.

Oracle hasn't stopped there, though, as it continues to innovate. The company made a deal with Nokia (NYSE: NOK  ) last month to get access to Nokia's mapping and location services, giving Oracle's business customers an ability to build custom applications to improve efficiency.

In its most recent quarter, Oracle's results had some investors concerned, with revenues falling and hardware sales in particular weighing on the company. But with strong software sales, it's hard to argue that Oracle is suffering.

For Oracle to improve, the most obvious place to look is its dividend. Along with IBM, Intel (NASDAQ: INTC  ) has paid substantial dividends for a long time, and even with its woes in keeping up with the mobile revolution, Intel's payout looks sustainable because of its healthy free cash flow. With many other tech companies finally joining the bandwagon, Oracle needs to raise its yield in order to compete for investor capital and get a little closer to perfection in the process.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Oracle provides a good example of how even large companies can keep up with the times. Intel hasn't done nearly as good a job, finding itself in the precarious situation of depending on PC-related products when PCs are in decline. Find out whether Intel is a buy in our latest premium report on the stock, in which our analyst runs through all of the key topics investors should understand about the chip giant. Better yet, you'll continue to receive updates as news develops for an entire year. Click here now to learn more.

Click here to add Oracle to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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