Given inconsistent performance, BMO Capital Markets believes that Oracle Corporation's (NYSE:ORCL) quarter and guidance, while not spectacular, is enough to push the shares higher. Further, while Oracle has not always delivered against longer-term guidance, BMO believes that comments that EPS will grow by 10% in FY2018 will generate investor interest in the shares given current valuation. BMO made minor adjustments to its estimates, and raised the firm's target price to $48 from $45, and retaining the firm's Outperform rating.
BMO's primary bullish thesis on Oracle is driven by the firm's view that it can grow operating income dollars, despite mix issues. In the February quarter, Oracle grew the operating income margin (42.5% vs. 42.4% in the February 2016 quarter), and grew operating income dollars by 3.2% y/y. For FY2018, BMO projects the operating margin to be roughly flat y/y, but the firm projects operating income dollar growth of 3.3%. If Oracle can consistently grow operating income, BMO believes the shares will move higher. As previously mentioned, BMO does not think Oracle needs to beat estimates.
While software maintenance in the February quarter was roughly in line with BMO's estimate (3% y/y CC growth), BMO believes that guidance implies that software maintenance will grow by less 2% y/y CC in the May quarter, despite upside in license revenue in the February quarter vs. the firm's model. BMO have lowered its projected FY2018 software maintenance revenue growth to 2.0% y/y CC, compared to 2.3% y/y CC growth previously. Given assumed maintenance gross margins of 95%, BMO believes that Oracle will have difficulty growing EPS double digits if maintenance revenue growth slows further.
BMO made only modest changes to its estimates. For example, BMO raised its FY2018 EPS estimate to $2.79 from $2.75. Despite Oracle's comments that it believes FY2018 EPS will grow by double digits, BMO project EPS growth of ~6% y/y. Moreover, the firm believes that investors would be positively surprised if FY2018 EPS grew by double digits. BMO raised its target price to $48 from $45, based on a P/E of 17x and EV/ FCF of 16x its FY2018 estimates. The firm's previous target price was based on 16x P/E and 14x-15x EV/FCF.
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