FixedIncome EducationalBuy Presentation

1
Fixed-IncomeEducational/Buy Presentation

• Vartan Pogharian Justin Dumitrescu
• Fixed-Income Analysts
• Western Investment Club

2
Oracle Corp (NDQ ORCL) Defensive Buy for a
Volatile Market

• Agenda
• Macroeconomic Analysis
• FI Market Analysis
• Investment Strategy
• Company Analysis
• Oracle Bond
• Recommendation

3
But first, a quick review
4
U.S. Economy

• US Dollar is at 10-year lows.
• We feel the US dollar has bottomed-out and will
  appreciate in 2005.
• This presents an opportunity to make currency
  gains on top of regular yields.

5
U.S. Economy

• Interest Rates (mixed sentiments)
• We expect continued measured rate increases
  (25bps) for the next two FMOC meetings (unless
  inflation spikes).
• The Committee perceives the upside and downside
  risks to the attainment of both sustainable
  growth and price stability for the next few
  quarters to be roughly equal. FMOC
• Short-term rate increases have not affected the
  long end of the yield curve a strong indication
  that investors are not that concerned about
  inflation.

6
Fixed-Income Market

• The short-end of the US yield curve is rising in
  response to the Feds measured rate increases.
• The long-end of the US Yield curve is dropping in
  response to investors expectations of inflation.
• The 10-year US treasury has moved around the same
  levels.
• The three situations combine to create a flat
  yield curve.

7
Investing Strategy Immunization

• The bottom-line is that interest rates are
  increasing.
• When rates increase, bond prices decrease.
• In a rising rate environment, we want to hold
  bonds that are somewhat immune to changes in
  interest rates.
• An effective way to achieve immunization is to
  hold bonds that have a low duration.

8
Investing Strategy Immunization

• Duration
• Duration measures a bond's market risk and price
  volatility in response to a given change in
  interest rates.
• Duration is a weighted average of the bond's cash
  flows over its lifetime. The weights are the
  present value of each interest payment as a
  percentage of the bond's full price.
• The longer the duration of a bond, the greater
  its price volatility.

9
Investing Strategy Immunization

• Duration
• Price volatility is good in a decreasing rate
  environment and bad in a increasing rate
  environment.
• When interest rates rise, bond prices fall.
  Bonds with a low duration will fall in price less
  than bonds with a high duration.
• Since we are in a rising rate environment, we
  want to hold bonds with a low duration.

10
Investing Strategy Immunization

• Duration
• Laws of Duration
• The shorter the maturity, the lower the duration
• The higher the coupon payments, the lower the
  duration.

11
Investing Strategy Immunization

• Duration
• Therefore, if we want to invest in a bond with
  minimal interest rate risk, a bond with high
  coupon payments and a short term to maturity is
  optimal.

12
Company Overview

• Oracle develops, manufactures, and distributes
  database software.
• Oracles software helps business manage and grow
  their operations.
• The company is organized into two operating
  segments software and service.

13
Company Overview

• A leader in the database software industry
• The second largest independent software producer
  in the world
• CEO Larry Ellison, an ambitious and shrewd
  businessman
• Demanded 100 revenue growth from its employees
  in 2000 and achieved 130 ROE

14
Financial Health

• Oracle is one of the least leveraged companies in
  the software industry
• Interest Coverage Ratio 220x
• Debt to Equity Ratio 0.02x
• Debt to Assets Ratio 0.01x
• Enjoys 54.9 ROE (over 5 years) compared to
  16.5 for the industry
• Very effective management

15
Financial Health
16
Financial Health

• Excellent cash position with stable but slightly
  increasing Cash from Operating Activities
• 2000 2,923M
• 2004 3,177M

17
PeopleSoft Acquisition

• Expected to increase 2005 and 2006 EPS by 25.
• 2006 pro forma EPS 76 80 cents
• Current EPS 56 cents
• Commitment to supporting the PeopleSoft platform
  but expected to merge into one product line over
  time

18
PeopleSoft Acquisition

• Cost savings expected by cutting 6000 jobs
• Duopoly allows for operations at high margins
• Acquired high profile customers such as IBM

19
Competitor Analysis

• Share of Enterprise Application market
• SAP 39
• Oracle (including PeopleSoft) 24
• Oracle competes selectively against SAP and has a
  dominance the banking industry
• SAP dominates the auto manufacturing and energy
  industries

20
Competitor Analysis

• The acquisition of PeopleSoft will allow Oracle
  to compete more effectively against SAP
• Oracles subscription pricing strategy has
  allowed it to operate at 28 net margin vs. SAPs
  18

21
Other Competitors

• Microsoft SQL database software
• Siebel Customer Relationship Management software
• Once allies, now compete head to head in the CRM
  market
• IBM DB2 database software

22
Price Chart
Regulatory Approval of PeopleSoft Deal
Analyst Downgrade
23
The Oracle Bond
24
The Oracle Bond

• High Yield 3.95
• Oracle has a relatively high yield (25bps above
  avg. Corp A and 65bps over the 2yr US Treasury).

25
The Oracle Bond
26
The Oracle Bond The good

• Short Maturity 02/15/2007
• High Coupon 6.91
• Decent Credit Rating SP A-
• Currency USD
• Duration 1.8 yrs

27
The Oracle Bond
28
The Oracle Bond The Bad

• Liquidity Very low (150MM)
• Features Callable
• Tech Company Unstable?

29
Summary

• We feel that the Oracle bond is an excellent
  acquisition for the WIC portfolio because
• It has a higher yield then comparable bonds.
• It has a lower duration than comparable bonds.
• Oracle is in excellent financial health.
• Its way sexier than Hydro One

30
Recommendation

• We recommend that WIC purchase 5 Oracle 6.91
  02/10/07 bonds.