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Jim Cramer's Action Alerts PLUS

Action Alerts PLUS

Oracle Has Work to Do

BY Jim Cramer and Stephanie Link | 09/18/14 - 06:44 PM EDT
Stocks in Focus: ORCL

Oracle (ORCL) reported fiscal first-quarter earnings tonight after the close that missed estimates for both the top and bottom lines. Software and hardware missed consensus estimates with their margins being the clear miss. This was partially offset by stronger-than-expected revenues in its cloud results, higher deferred revenue and record cash levels. The company also announced a new $13 billion buyback program and now has $15 billion in total authorization.

But the real headline is that long time CEO Larry Ellison will step down from his position to become executive chairman. He will take on the role as the head of technology. Ellison co-founded the company and has run it since 1977. He turned 70 last month.

The current co-Presidents, Mark Hurd and Safra Catz, will become co-CEOs of the company. Hurd runs sales, marketing and support and Catz is in charge of financial and legal operations. Catz will remain CFO at the firm.

The company downplayed the changes on the conference call (saying there will be “no meaningful changes” in the day- to-day operations) but we think the move makes sense. The company is undergoing a big transition away from the legacy hardware exposure and toward the faster-growing cloud segment.

The shares are down 2% on the news but trading at 12.8x forward estimates. Expectations are very low and the new buyback should be supportive to the shares. More importantly, while Ellison is removing himself from the day-to-day CEO responsibilities, he will remain involved on the technology side. This is important not only because of his extensive expertise but also because it also gives the company a fresh start by allowing these two managers to drive business and growth.

The way we see it, Oracle is about two years behind Microsoft (MSFT) and Adobe (ADBE) in the cloud transition. The company missed the early trend entirely so it is now playing catch-up. We think management can do it -- the market is large enough and Hurd and Catz have credibility on the execution front. But it will take time.

The first quarter is seasonally the company’s slowest and smallest of the year. But the results were not inspiring other than cloud. Earnings were $0.62 vs. the $0.64 consensus and at the low end of the $0.61-$0.65 projections on a constant currency basis from management’s guidance. Revenues also missed consensus estimates of $8.6 billion. They were up 3%, year over year, vs. the $8.85 billion expectation and they came in at the low end of the company guidance of 3%-5% constant currency.

Software + cloud totaled $6 billion in revenue and rose 6%, which was in the middle of the 5%-7% constant currency guidance. This was slightly lower than the $6.6 billion consensus estimate, but we view the cloud component as encouraging. Software as a service (SaaS) and Platform as a Service (PaaS) cloud revenue rose 32%, year over year, to $337 million, which was ahead of the $333 million consensus estimate. Infrastructure as a service (IaaS) cloud revenue was up 26% to $138 million and also better by $10 million.

The company added 500 new customers in cloud. Unfortunately, this is a small segment in the software division and needs to get meaningfully bigger to move the needle. Mergers and acquisitions (M&A) come to mind, we expect this to be a bigger focus for the firm in the future. It’s worth pointing out that after the close, SAP (SAP) announced the acquisition of Concur Technologies (CNQR) to beef up its cloud offering.

Hardware was a disappointment, coming in at $1.2 billion and below the $1.28 billion consensus estimate. It was within the -2% to +2% guidance -- but 1% growth is hardly inspiring. Engineered systems grew double digits, offset by declines in legacy systems (Sparc Systems). Operating margins was the clear miss: At 44%, it was well below the 45.6% consensus estimate. Deferred revenue was a highlight and grew 5%, year over year, to $8.9 billion. Cash/marketable securities now total a record $52 billion ($47 billion excluding micros). The company has bought back 5% of its outstanding shares in the last year.

Earnings guidance for the second quarter was below plan with softness in hardware worse than expected, software in line and higher cloud growth. Adding it up, the fiscal second quarter will now be $0.68-$0.72 vs. the previous $0.74. Hardware systems revenue will be down 8% to up 2% and software revenue will grow will to 5%-8%. Cloud SAAS is expected to be up 39%-44%, and cloud IaaS to be up 40%-44%, which totals revenue growth of up 2%-6% growth vs. the 4.6% consensus.

This quarter won’t change the bears’ way of thinking. That likely won’t change until the company can demonstrate more consistent results and growth in the cloud that makes a meaningful difference. That said, the stock is cheap, and the company is a cash flow machine that can do M&A deals to increase the growth that it needs.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUS was long ORCL and MSFT.

Adding to AIG and Cigna
Stocks in Focus: AIG, CI

We're making a rare exception for Cigna.

09/18/14 - 01:35 PM EDT
Buying Up More Macy's
Stocks in Focus: M

This is a solid story, and the stock trades at a discount to the group and the broader market. Also, a word on Walgreen.

09/18/14 - 10:14 AM EDT
Weekly Roundup

We made a few buys this week as the major indices cooled a bit.

09/12/14 - 05:07 PM EDT

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Action Alerts PLUS Holdings

Stocks we would buy right now

Symbol % Portfolio
Weighting
Current
Price
Avg.Cost
Basis
% Gain/
Loss
AIG 2.58% $55.30 $55.81 -0.91%
AXP 4.19% $89.71 $87.28 2.78%
BWP 3.09% $19.10 $19.25 -0.80%
CI 3.08% $95.34 $89.25 6.82%
DOW 4.34% $53.77 $52.60 2.23%
ESV 3.04% $44.55 $51.53 -13.54%
ETN 4.05% $66.43 $75.10 -11.54%
FCX 3.12% $34.04 $38.22 -10.93%
KMI 2.47% $38.28 $39.60 -3.33%
M 2.16% $60.20 $60.07 0.21%
MMM 1.85% $147.23 $141.54 4.02%
MSFT 1.52% $46.90 $43.53 7.74%
ORCL 2.97% $39.40 $41.77 -5.67%
PVH 2.27% $126.24 $112.61 12.10%
RDS.A 2.82% $78.67 $80.37 -2.11%
SBUX 3.14% $75.98 $78.22 -2.86%
STI 4.63% $40.34 $38.80 3.98%
TWTR 2.01% $51.02 $50.73 0.57%
UPS 2.15% $99.60 $97.24 2.42%
VALE 1.51% $12.01 $14.60 -17.76%
WAG 2.72% $63.20 $62.62 0.92%

Stocks we would buy on a pullback

Symbol % Portfolio
Weighting
Current
Price
Avg.Cost
Basis
% Gain/
Loss
AAPL 2.99% $101.47 $79.05 28.36%
BAC 3.97% $17.01 $15.61 8.98%
FB 3.86% $76.89 $64.23 19.71%
GM 4.15% $33.96 $37.69 -9.89%
GOOGL 4.85% $600.25 $574.35 4.51%
GS 3.01% $186.00 $162.86 14.21%
JNJ 2.41% $108.20 $91.83 17.82%
LEA 3.35% $98.13 $96.39 1.81%
SWK 2.84% $93.07 $84.55 10.08%
UTX 4.37% $108.25 $115.41 -6.20%

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