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Oracle Corp. (ORCL - Analyst Report) reported better-than-expected fiscal second quarter results last month that included a positive earnings surprise and a solid outlook. In response, Zacks Consensus Estimates for fiscal years 2013 and 2014 have been heading higher, boosting this technology giant to a Zacks #2 Rank (Buy).

Oracle’s dividend yield of 0.7% reflects a strong and relatively stable cash flow, which makes the stock much more attractive for investors.

Oracle Beats in Q2

On December 18, 2012, Oracle reported fiscal second quarter earnings of 60 cents per share, which exceeded the Zacks Consensus Estimate by 3.5%.

Total revenue increased 3.4% year over year to $9.11 billion, primarily driven by strong new software license sales that fully offset a continued weak performance from the hardware product lines.

Operating margin expanded 190 basis points (“bps”) from the comparable prior-year quarter, primarily attributable to stringent cost control. Total operating expenses remained flat year over year at $5.03 billion.

Oracle’s liquidity position continued to improve in the quarter. Operating cash flow was $13.53 billion and free cash flow was $12.82 billion at the end of the reported quarter.

On December 21, 2012, Oracle paid an accelerated cash dividend of 18 cents for the second, third & fourth quarters of fiscal 2013.

Positive Outlook

Oracle provided a positive outlook for the third quarter of fiscal 2013. The company expects non-GAAP earnings between 64 cents and 68 cents per share, which is higher than the year-ago level of 62 cents. Total revenue on a non-GAAP basis is expected to grow 1.0% to 5.0%.

Over the last 30 days, the Zacks Consensus Estimate for fiscal 2013 climbed 1.6% to $2.57 per share, as 12 of 19 estimates moved upward.

The Zacks Consensus Estimate for fiscal 2014 advanced 3.2% over the same period to $2.80, as 11 of 18 estimates received a boost.

Dividend

In addition to the strong earnings growth, Oracle’s dividend yield of 0.7% is quite steady. It started paying a regular cash dividend from the fourth quarter of fiscal 2009. Oracle raised the dividend payout by 20% (20 to 24 cents) in the fourth quarter of fiscal 2011.

Valuation

Oracle shares are currently trading at 13.5X forward earnings, a discount to the industry average of 16.2X. Additionally, its price-to-book multiple of 3.8 is lower than the industry average of 4.3. Moreover, its PEG ratio is 1, based on a 5-year earnings growth rate of 13.4%. This indicates that the stock is undervalued.

Redwood City, California-based Oracle Corp. was founded in 1977 and incorporated later in 2005. Oracle is one of the largest database and enterprise Software providers. With the acquisition of Sun Microsystems in January 2010, Oracle began selling hardware products and services, primarily comprising computer server and storage products. Oracle has a market capital of $165.34 billion.


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