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Despite headwinds, all signs point to a stronger Oracle Add to ...

Analysts are expecting software giant Oracle Corp. to top forecasts when it reports earnings on Thursday, even though investors have cooled to the shares, sending them down 12 per cent since May.

Several forces lie behind the decline, including the broad market selloff of the past few weeks, concerns about how Oracle will sustain growth, and the fact that year-earlier comparisons will no longer get an easy lift from Oracle's acquisition of Sun Microsystems Inc., which was made in January, 2010.

Oracle, second in size only to Microsoft Corp. among business software companies, is an important bellwether for the U.S. economy in general and for the technology sector in particular. Its enterprise and database software is used by a broad swath of large companies.

Brian Schwartz, an analyst with ThinkEquity LLC, says investors are underestimating the company. He rates the shares a "buy" and has a $40 (U.S.) target on them, calculated at 15 times estimated share profit for next calendar year. While that multiple is slightly above the group average of the S&P 500 index, it is in line with historical levels for Oracle, he said.

Oracle shares closed Wednesday at $32.65, up 74 cents.

Mr. Schwartz and other analysts say surveys of Oracle partners and resellers suggest the company had a good quarter, with strong sales of databases, applications and servers.

Thursday's results will be the first to include year-over-year comparables for Oracle's hardware business, which the company acquired with its purchase of Sun Microsystems.

Why Buy

David Hilal of FBR Capital Markets had forecast that hardware systems revenue would hit $1.4-billion, representing a 9 per cent annual gain, but in a report this week he said there is a good chance Oracle will exceed that target. Mr. Hilal rates the shares "outperform" and has a $40 price target on them.

More than 80 per cent of analysts who follow Oracle rate the company's shares a buy. Derrick Wood of Susquehanna International Group LLP is one of only six who are neutral on the stock. He, too, thinks Thursday's results will prove strong but he forecasts headwinds in the second half of this fiscal year as spending on applications slows and hardware profits slip. He has a price target of $35 on the stock.

Oracle has never been shy about throwing its weight around in the market or in the courts. It has found itself in the headlines this month over legal battles with Google Inc. and Hewlett-Packard Co.

It is suing Google for billions of dollars in damages, claiming the company's Android smart phone software uses patents that link back to Sun Microsystems. Google claims the patents are invalid.

Recently Oracle decided to stop providing database support for a class of microprocessors made by Intel Corp. to power top-of-the-line servers from Hewlett-Packard. Originally, the partnership between Oracle and HP proved beneficial to both. But the dynamics changed when Oracle bought Sun Microsystems, whose hardware competes against HP's. Last week, HP filed suit against Oracle, claiming the software giant had broken an agreement, a charge that Oracle denies.

Aggressive Strategies

Mr. Wood says Oracle's "aggressive competition strategies" have the potential to unnerve customers. These conditions create uncertainly and could cause some customers to "rethink their strategies," he said.

Chief executive officer Larry Ellison, who founded Oracle in 1977, has pursued an energetic acquisition strategy while maintaining a reputation for not overpaying.

This expansionist strategy will continue to drive growth, says Mark Murphy, an analyst with Piper Jaffray & Co. "Because of its massive scale, Oracle can acquire companies with 10 per cent to 20 per cent operating margins, strip out costs, and rapidly realize 40 per cent operating margins for the acquisition target," he says.

Mr. Murphy says there are at least 50 publicly traded software companies, with revenues between $300-million and $6-billion each, that could become fodder for the Oracle machine. He has an "overweight" rating on the stock and a price target of $37, based on a multiple of 16 times share profit this fiscal year.

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