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In the wake of Oracle's earnings report and cautious outlook, Standard & Poor's is keeping its 5 STARS (buy) ranking on enterprise software providers Microsoft (MSFT
) and Sybase (SY
). Shares of enterprise software providers were down 7% on average on Mar. 19, following the mildly disappointing third-quarter report from Oracle (ORCL
).
We at S&P believe that over the short term, this group will continue to be quite volatile given the geopolitical environment. Business fell for Oracle in February because customers were holding off on info-tech spending due to concerns over the looming war with Iraq. Investors may be concerned that software companies with March-quarter closings will soon experience similar weakness in demand.
However, we still recommend purchasing the high-quality names that continue to take market share, such as Microsoft, or companies with compelling valuations, such as Sybase. We think these stocks will outperform the broader enterprise-software group over the next 6 to 12 months and provide some support to the group in a difficult environment.
NOTABLE REBOUND. For Oracle, we at S&P reiterate our accumulate (4 STARS) ranking. After the market close on Mar. 18, it reported earnings per share of 11 cents, vs. 9 cents in the year-ago period and a penny above the consensus estimate. Revenue rose 2%, to $2.31 billion, slightly better than our estimate.
Oracle noted that new software license revenues were down 4%, to $755 million, while software license updates and product-support revenues rose 16%. Oracle says it saw a notable rebound in the Asia/Pacific region. Though Oracle said the first two months of the quarter were solid, February saw a sharp dropoff in deal closings and sales due to its customers' geopolitical concerns.
Oracle's operating margin remained strong at 34.5%. We're keeping our EPS estimate for fiscal year 2003 (ending May 31) at 41 cents, and we see 44 cents in fiscal year 2004. With Oracle's mid-30% return on equity, operating margins in excess of 30%, more than $6.2 billion in cash and investments, and little debt, the database leader remains attractive at a discount to its intrinsic value.
Analyst Rudy follows software stocks for Standard & Poor's
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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