Oracle and Jabil: Two Techs for Value Investors

03/22/2019 5:00 am EST

Focus: TECHNOLOGY

Chris Quigley

Contributing Editor, The Prudent Speculator

Inevitable downturns are part of the investment process; however, we see no reason to alter our enthusiasm for the long-term prospects of our broadly diversified portfolios of what we believe to be undervalued stocks, suggests Chris Quigley, value investor and contributing editor to The Prudent Speculator.

System software firm Oracle (ORCL) earned $0.87 per share in fiscal Q3 2019 (vs. $0.84 est.). ORCL had total revenue of $9.6 billion, matching the analyst consensus estimate.

Co-CEO Safra Catz said, “Total cloud services and license support revenue for the quarter was $6.7 billion, up 4% in constant currency and now accounts for nearly 70% of total Company revenue, largely recurring revenue."

ORCL expects a currency headwind of 3% for fiscal Q4 (an EPS drag of approximately $0.03 per share) and EPS between $1.05 and $1.09, while revenue is expected to grow 1% to 3% in constant currency terms.

The company expects a tax rate of 20%. In addition, ORCL raised its quarterly dividend from $0.19 per share to $0.24 per share. Over the past year, ORCL has repurchased 728 million shares and reduced total share count by 16%.

We continue to be encouraged by the possibilities in the cloud business and we believe that ORCL has an experienced leadership team that will drive top-line growth to the bottom line.

Although the stock didn’t rise as we might have expected, given the bottom-line beat and the decent guidance, we note that ORCL shares have ascended nearly 25% since December 24.

The stock has a strong score in our proprietary valuation algorithm and inexpensive fundamental metrics like a 14.2x forward P/E ratio. Our Target Price is $60. ORCL currently yields 1.8%.

Electronic manufacturing services firm Jabil (JBL) reported earnings per share of $0.64, versus the $0.61 estimate, in fiscal Q2 2019. JBL had total revenue of $6.1 billion, in line with the analyst consensus estimate.

JBL was propelled by solid EMS (Electronics Manufacturing Services) revenue growth and strong demand in the cloud, retail and industrial sectors. We were pleased to see Jabil opportunistically snapping up nearly 6 million shares of its stock at an average price of $24.35.

We think that the EMS business is also attractive, especially as the company continues to bring in new business, while its deal with Johnson & Johnson (JNJ) has been, as management says, “sensational.” JBL expects the joint effort to yield between $800 million and $1 billion of revenue in fiscal 2020.

Of course, we also note that the stock presently trades for just 8.6 times the current EPS estimate for the next 12 months. Our Target Price for JBL has been raised to $44.

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