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Joel Greenblatt and Paul Tudor Jones´ Bet on Mid-Cap Tech
Posted by: Damian Illia (IP Logged)
Date: December 16, 2013 05:30PM
The stock of Verint Systems (VRNT), a mid-cap provider of Actionable Intelligence solutions and value-added services for enterprise workforce optimization and security intelligence, is up more than 35% year-to-date. Nonetheless, analysts do not expect it to outperform its peers in terms of EPS growth over the next few years to come. So, why are investors liking this stock so much? Why are Joel Greenblatt and Paul Tudor Jones among those gurus bullish on the company? Should analysts reassess their projections?
Big Data – Big Opportunities
The rapid growth of the “big data” segment has created big opportunities for specialized companies. This has been the case for Verint Systems, which focuses on unstructured data like voice and video, among others. It helps its clients by keeping record and analyzing voice and text interactions, in order to gain efficiency and increase security levels.
Despite the fact that Verint’s importance to its customers’ operations is big and switching costs, high, the company is subject to the availability of funds to be allocated to big-data security, which is largely correlated with macro-economic factors. In addition, the company faces strong competition from larger companies like Honeywell (HON), United Technologies (UTX), and BAE Systems (BAESY), and, especially, from NICE Systems (NICE), which has a similar market cap and competes in the same market niche as Verint. By the way, both of them are Israeli companies. However, Verint sets itself apart from NICE Systems by focusing on security and government work. NICE instead centers its attention on enterprise and call center markets.
Two weeks ago, Verint released its third-quarter results and beat consensus estimates (for example, it surpassed EPS consensus estimates by 23.10%). Earnings were mainly driven by two major deal wins in the communications intelligence sub-segment, which reported revenue growth of 30.6%, to $71 million. Other sub-segments´ sales also grew, although at slower rates.
Although analysts believe that this results were a one-time-only kind of thing, the management stated that they believe that it is just the start of a trend. The increasing use of multichannel analytics should continue to drive cross-selling capabilities and growth over the next several years, they say.
The company also updated its full-year growth forecasts. EPS guidance was elevated to $2.75 to $2.80, and revenue projections were lifted to 6.5% to 7.5%, up from 6% to 7%.
In addition to its consensus beating results, Verint has considerable free cash flow generation capabilities. Free cash flow grew to $154 million over the past 12 months, compared to $90 million in fiscal 2012. This means that free cash flow increased by 71% in about one year.
When this, plus its return on equity and above average margin levels are taken into account, its valuation at 37.3 times its earnings does not look that bad. When compared to its closest competitor, NICE, Verint looks even better.
Moreover, Verint´s valuation looks pretty reasonable when one considers the fact that it is still in a growth phase: forward P/E ratios stand around 14-16 x. So this looks like a good time to buy, to place a bet on future profits.
Disclosure: Damian Illia holds no position in any stocks mentioned.
Guru Discussed: Joel Greenblatt: Current Portfolio, Stock Picks
Paul Tudor Jones: Current Portfolio, Stock Picks
Stocks Discussed: VRNT, NICE, HON, UTX, BAESY,