Oracle’s Unknowns, and Waiting to Exhale
The Times today continues a new feature, Stock Exchange, in which staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.
ORACLE (ORCL)
Jim: Mike, what’s the most distinctive thing about Oracle Corp.?
Mike: That would be its chairman and co-founder, the billionaire Larry Ellison.
Jim: He’s one eccentric dude, isn’t he?
Mike: Well, he’s an interesting dude, and certainly hyperactive. Larry Ellison inspires me to coin an essential rule of investing.
Jim: Which is?
Mike: When you see the CEO of a major corporation photographed in the cockpit of a fighter plane, it may be time to sell--unless, that is, he’s been called up on active duty.
Jim: That’s not the case with Ellison. Flying his own private jet fighter is just one of his many hobbies.
Mike: He also goes on three-month yacht cruises. He appears on “Oprah,” bemoaning his existence as a multibillionaire Lonely Guy. He proselytizes about “network computers” as alternatives to Windows PCs. So the bottom-line question is: How long can shareholders count on Ellison actually paying attention to what’s going on at Oracle?
Jim: At the moment, though, Oracle’s got his undivided attention.
Mike: That’s because its business has been suffering, in part from his inattention. Lately he and his No. 2 guy, company President Raymond Lane, have appeared all over the business press testifying to how busy they are fixing what’s wrong with Oracle.
Jim: Before we get ahead of ourselves, let’s quickly go over what Oracle does.
Mike: Sure. Oracle has long been the leading provider of database software for big corporations.
Jim: Please translate.
Mike: Databases are the repositories of a company’s most important data--shipping statistics, customer orders, supplier deliveries, you name it. A major corporation today has to maintain a reliable computerized database, along with programs allowing it to access and collate the information within.
Jim: So it’s the memory and central nervous system put together, correct?
Mike: Fair enough. And that’s a business Oracle has more or less owned for years. More recently it got into database applications, which are the programs that help companies extract critical information from the databases.
Jim: For years this was a hugely growing business.
Mike: It’s still a growing business--it’s growing competitors. That’s one reason Oracle’s in big trouble.
Jim: A lot of things have gotten it into trouble.
Mike: That’s right. Software sales growth is way down, especially in applications and by comparison to its toughest competitors, which are the upstart company PeopleSoft and the German database behemoth SAP. Asia’s woes weigh heavily here by pushing down Oracle’s sales of its Unix-based database packages, which were strong in that region.
Jim: Any other problems?
Mike: I think the basic problem here is attention-deficit disorder.
Jim: Meaning?
Mike: Meaning that Ellison, who’s a dynamic figure when he’s engaged, seems to get bored as soon as things settle down. Then management doesn’t get engaged again until the horse is halfway out of the barn, at which point they’re quoted saying, “Gee, maybe we should have focused on this earlier.”
Jim: That’s perilous when you have a business that requires constant tweaking and customer service. Speaking of which, isn’t Oracle pinning great hopes on the growth of its consulting line?
Mike: Unsurprisingly. In the quarter ended May 31, that was its strongest performer. But this company also has a lot riding on the introduction this fall of its upgraded database, Oracle8i. What will happen, I wonder, if Oracle8i gets unavoidably delayed?
Jim: It doesn’t take an oracle to divine how investors will respond.
Mike: This company needs a lot of tender loving care. If the moment things get back on track management is going to go off on a tangent, then I think investors have reason to be concerned.
Jim: It’s going to be a long time before Larry Ellison goes off on a tangent, because it’s going to be a long time before Oracle gets back on track. And that’s why I wouldn’t buy this stock with your money.
Mike: Thanks for looking out for me.
Jim: Now, I know it’s got a price-earnings multiple of about 23 for fiscal ’99 ending next May, which is extremely low for a hotshot software stock like this.
Mike: Especially one that keeps uttering the word “Internet.”
Jim: But last December, when a bad earnings report shaved about 30% off this stock, a lot of people thought this was a classic buying opportunity.
Mike: And since then?
Jim: We’re now almost three-quarters of the way through this year and the stock is stuck exactly where it was back then, in the mid-20s. So even Wall Street realizes this is not going to be a quick fix of a single problem. Just because Ellison appeared at the front gate with sleeves rolled up doesn’t mean Oracle is quickly going to regain the predictable earnings growth that made it a star.
PHILIP MORRIS (MO)
Mike: Philip Morris has been one of the bluest blue chips in the market. But are you having as much trouble putting a value on this company as I am?
Jim: Yes, because the ground around this company keeps shifting each day. I’m referring, of course, to the massive lawsuits swirling around Big Tobacco. Philip Morris is the No. 1 puff daddy around, with Marlboro and other brands.
Mike: But it’s more than smokes.
Jim: Right. It’s got the Kraft food business, which includes Jell-O, Kool-Aid, Oscar Mayer and Velveeta cheese, and it brews Miller beer.
Mike: All the stuff we’re told we shouldn’t eat or consume but is found in every kitchen in the country. What a great business!
Jim: This is what a big-cap stock is all about. Its total market value is $100 billion. It has 2 1/2 billion shares floating around. It’s in the Dow Jones industrial average. The stock is a huge favorite of institutional investors, and it’s held by mutual funds in goodness knows how many 401(k) plans, including the plan of Times Mirror, which publishes this newspaper and in which both of us are enrolled.
Mike: Institutions own more than 60% of Philip Morris.
Jim: They must know something, because they’re professionals, right? But the stock is down 4% this year, at around $44, and it’s up a meager 10% since January 1997.
Mike: And almost all of that gain has come in the past couple of weeks.
Jim: That’s right, because the whole story with Philip Morris is this litigation, and there’s been speculation it might finally be resolved. Can you tell us in two cogent sentences what that’s all about?
Mike: No! And I don’t think anybody can--which is the problem in a nutshell.
Jim: Exactly. Philip Morris and the rest of Big Tobacco are to trying reach a massive settlement with a passel of state attorneys general who are suing them for public health problems related to cigarettes. Looked as if they had a deal last year, with Big Tobacco having to pay up, oh, $350 billion. But Congress never passed the deal.
Mike: In part because the tobacco companies balked at the final settlement that was proposed.
Jim: Now they’re trying to strike another deal, but who knows?
Mike: That’s right. This is a company whose fate is almost entirely out of its own hands. The settlement negotiations involve trial lawyers, elected attorneys general, congressmen, senators and tobacco executives. Any agreement will require the greatest display of public-minded prudence and statesmanship since Thomas Jefferson turned down a third presidential term. With this gang, what are the chances?
Jim: It’s a wonder that group can agree on what day it is. Anyway, this is why I wouldn’t buy the stock. And we don’t even know yet whether Philip Morris and the others would be protected from more lawsuits down the road.
Mike: Ironically, this is a company I would love to love, but I can’t. Philip Morris even has a feature that’s increasingly rare today--a very healthy dividend of around 4%. But it’s fair to ask whether that’s enough reason to hold such an increasingly speculative stock.
Jim: Food accounts for a third or so of Philip Morris’ profit. If that’s all there was, the shares might be selling for double what they do now. Why not split it from the tainted tobacco line? Then maybe the two parts would be worth more than the whole?
Mike: Not so fast. It’s a big unknown whether Philip Morris can legally segregate the food business from the liabilities hanging on tobacco.
Jim: There’s another problem. I’m convinced cigarette prices will keep rising, partly because of higher taxes and partly so Philip Morris and the others can pay for the litigation settlement and keep going. That’s going to make people buy fewer smokes, no matter how addictive nicotine is.
Mike: I agree, it’s inevitable. We’re likely to see these shares periodically jump in price whenever a settlement seems near. But it’s going to be a long, rocky road, and the real upside in Philip Morris seems well over the horizon.
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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.
