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Weekly Wrap: Strategy Drives Intel, Good Growth at Oracle

Fri, 17 Mar 2017

We don't see value in Intel or Oracle shares today, but Williams-Sonoma looks cheap. Plus, a potential winner amid potential tax reform.


Video Transcript

Jeremy Glaser: Intel drives away with Mobileye; Oracle has a strong quarter; Williams-Sonoma looks cheap; and a potential big winner from tax reform. This time on the Morningstar Weekly Wrap.

Intel is spending $15.3 billion to buy Mobileye to give it a stronger foothold in the self-driving car market. Morningstar's Abhinav Davuluri sees strong strategic rationale in the deal given the need for a connection between cars and data centers as vehicles become more autonomous. Still, he's holding his fair value estimate for Intel steady as the premium price they're paying for the firm offsets the potential synergies.

Oracle saw good growth across its cloud businesses last quarter, but Rodney Nelson thinks there are better investment options elsewhere. 

Rodney Nelson: Oracle reported third-quarter results that reflected strength across each of its cloud businesses. SaaS and PaaS revenues grew more than 70% in the quarter, boosted by Oracle's recently closed acquisition of NetSuite. Meanwhile, the firm's revamped infrastructures and service offering delivered its first meaningful quarter of growth in some time, delivering sales growth of 17% in the third quarter. While we think Oracle's infrastructure offering can provide some unique use cases for existing database customers, we think the firm generally has an uphill battle as it competes with entrenched vendors such as Amazon, Microsoft, and Google. We have raised our fair value estimate for Oracle to $40 per share from $38 previously, but after a significant rally in the stock on the back of these results we think the stock looks fairly valued. 

Glaser: Williams-Sonoma bucked a trend toward weaker margins in the retail space as the firm posted improved merchandise margins last quarter. The competitive environment and a softer housing market did weigh on revenue growth, and analyst Jaime Katz did modestly reduce her 2017 top-line forecast. Still, she sees the shares trading at a deep discount to fair value today.

Many investors have been trying to assess who the potential winners are in the event significant tax reform is passed in Washington. Matthew Young thinks freight-broker C.H. Robinson is a good candidate. 

Matthew Young: Wide-moat truck broker C.H. Robinson is currently trading in fairly valued territory. We think there's a few states of the world in which the firm could look modestly undervalued. First is tax reform, if you took a 20% corporate tax rate, for example, the one proposed by House Republicans. We estimate our fair value could come up roughly 20%, all else equal. What's interesting about that is most of the firm's truck brokerage peers would also see roughly a 20% increase in their fair value, but most of those would still be trading at or above our respective fair value estimates. We think the reason for that is a little bit of an overhang from gross margin compression for C.H. Robinson. We think oftentimes, or oftentimes in periods of that margin compression, the market misunderstands the firm's solid competitive positioning and negative investor sentiment rises.

Along those lines, we think that if gross margin sees a lot of variability in the quarters ahead or compress more than expected, it could create a buying opportunity if people misunderstand the firm's competitive positioning. We think investors should recall or remember that the firm has a wide economic moat rooted in the network effect. The network effect in truck brokerage come out to fairly solid defense for the firm's market share position.

Glaser: And in case you missed it, on Morningstar.com this week, Karen Wallace looked at why there still may be value in retail REITs.

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