BMO Upgrades Oracle To Outperform, Sees 17% Upside

BMO Capital’s Keith Bachman expressed increased confidence in Oracle Corporation ORCL being able to meet the estimates and the consensus, as well as generate operating income growth.

Bachman upgraded the rating on the company from Market Perform to Outperform, while raising the price target from $45 to $47.

The analyst expects the stock to have potential upside of 17 percent.

Operating Income Growth

The company’s non-GAAP operating income decline by 9.3 percent in FY2016, driven by revenue declines and mix. Operating margin declined from 45.5 percent in FY2015 to 42.6 percent in FY2016.

“We project operating margin will be flat to modestly higher in FY2017 and in FY2018,” Bachman mentioned.

Related Link: Jefferies On Hewlett Packard Enterprise: Acquisitions Unlikely, But Dividend Raise Possible

Given the company’s stable to higher operating margins, along with revenue growth of 2–3 percent, the analyst believes that Oracle’s operating income would grow by 3.6 percent in FY2017 and 3.9 percent 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,” Bachman said.

Estimate Lowered

The analyst had earlier raised concerns regarding the sustainability of Oracle’s software maintenance, along with potential decline in revenue growth rates.

The concern proved valid, given that the software maintenance growth estimate from 5 percent to 3.5 percent for FY2017.

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

At time of writing, Oracle was up 0.88 percent on the day at $41.14.

Did you like this article? Could it have been improved? Please email feedback@benzinga.com to let us know!