BMO Capital Has Increased Confidence in Oracle (ORCL) and Raises Rating to 'Outperform'

(Updated - July 12, 2016 9:40 AM EDT)

BMO Capital upgraded Oracle (NYSE: ORCL) from Market Perform to Outperform with a price target of $47 (prior $45). Analyst Keith Bachman has higher conviction that Oracle can meet consensus estimates and generate growth in operating income.

"In FY2016, Oracle's non-GAAP operating income declined by 9.3%, negatively affected by revenue declines (including FX) and mix, with operating margin declining from 45.5% in FY2015 to 42.6% in FY2016. We project operating margin will be flat to modestly higher in FY2017 and in FY2018. Given stable to higher operating margins, combined with 2%-3% revenue growth, we believe that operating income will grow by 3.6% in FY2017 and 3.9% in FY2018. Therefore, as Oracle grows operating income, we believe its multiple will expand, as its operating income has declined for the past two years," said Bachman.

"We have previously raised concerns about the sustainability of software maintenance and the potential for revenue growth rates to decline. In fact, our concerns proved valid, as on the last earnings call we lowered our software maintenance growth assumptions from ~5% to 3.5% in FY2017. Importantly for this rating change, we believe that our maintenance estimates are reasonable," continued the analyst.

Bachman added, "Finally, we think Oracle will continue to be aggressive with total shareholder capital allocation, and we do not envision any large M&A transactions."

For an analyst ratings summary and ratings history on Oracle click here. For more ratings news on Oracle click here.

Shares of Oracle closed at $40.78 yesterday.

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