Notable Calls

Morgan Stanley is out quite positive on Oracle Corp. (NASDAQ:ORCL) raising their price target to $31 (prev. $29) and adding the stock to to Morgan Stanley’s Best Ideas list.

Firm notes they see three catalysts: 1) imminent closure on the Sun acq., whose benefits are being largely overlooked, 2) a return to organic growth in Oracle’s core as early as Q3, and 3) positive revisions. Morgan Stanley's FY11 EPS of $1.94 is well above cons. of $1.72, which does not reflect a) accretion from Sun, and strong execution should enable ORCL to meet/exceed its $0.15 target, and b) the level of improvement in the core bus. that they anticipate. With ORCL trading at 12X our CY11 EPS – a sub hardware multiple on software EPS and 25% below large-cap tech – they should see multiple expansion with accelerating growth and pos. revisions, driving the stock to firm's $31 PT based on 15x CY11 EPS of $2.09.

Sun should be positive catalyst: Based on Morgan Stanley's proprietary analysis of Sun published on December 22nd, they est. ORCL can drive at least $0.15–0.20 of EPS accretion if they execute well on the deal, and while cyclical rev. improvement is likely, it would be incremental to those ests. Further visibility from ORCL on the strategy will improve both investor comfort in Sun’s strategic value, as well as the financial benefits.

Core businesses improving: Firm's checks indicate that the applications & database market are improving, and the co. is seeing an uptick in ELA activity. Sun has taken investor focus off the core bus., yet they believe the co. will be a net share gainer as IT spending recovers. Cons. lic. targets reflect little improvement in CY10, while they think ORCL should see (cc) license growth accelerate for the next 4-6 Qs and upside to forecasts.

Major product cycles: For the first time in a decade, ORCL has product cycles in all major areas: Database 11g R2 (released in 9/09), Middleware 11g (released in 7/09), and Fusion Applications—which should be a cantilever for growth as IT spending improves.

ORCL’s multiple has contracted 30%+ in the last 5 years, suggesting the acquisition strategy is yielding underappreciated benefits in a) accelerating technology growth, b) accelerating margins and c) an ROIC above WACC.

ORCL’s 12X CY11 EPS valuation is ~40% below Morgan Stanley's software group’s median P/E of 22X. As consensus EPS begins to move up, yielding 20% growth in CY11 earnings, investors should find multiple avenues for price appreciation in ORCL.

Notablecalls: Interesting call from Morgan Stanley. I think the stock will react positively with upside to the tune of $0.50-0.75 over the course of the day if the market plays ball.

Note that in addition of adding ORCL to MSCO's Best Ideas list, they have issued a Research Tactical Idea on the name which should create some additional buy interest.