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Using Technology to Modernize Investors' Portfolio
Posted by: Patricio Kehoe (IP Logged)
Date: March 25, 2014 05:27PM
CA Technologies (CA) is an enterprise information technology (IT) management software and solutions company. The company’s products are designed to operate in a range of IT environments, from mainframe and physical to virtual and cloud. The company has three operating segments: Mainframe Solutions, Enterprise Solutions and Services.
The company adopted the “go to market”, sales strategy. An action plan that specifies how a company will reach customers and achieve competitive advantage through all the commercial functions including sales, marketing, brand management, pricing and consumer insight, to drive the bottom line.
In 2010, the company acquired privately held Nimsoft, a provider of IT performance monitoring solutions for $350 million in cash. In Sep 2010, CA signed a definitive agreement to acquire Hyperformix Inc. Recently; it acquired Layer 7 Technologies, a leading provider of Application Programming Interface (API) security and management. Furthermore, the acquisition of Arcot Systems Inc., a privately held company that provides authentication and fraud prevention software, in a move to boost its security offerings. These acquisitions have helped the firm to strengthen its cloud computing infrastructure and would also help to generate better profitability from the existing technology assets.
In FY 11, the company completed a $218 million share repurchase program. In May 2011, directors approved another stock repurchase program. The company intended to buy back up to $1.5 billion of common stock. The company said it will repurchase $500 million of the total in an accelerated share repurchase program. As of March 31, 2013, the company had reduced its total debt 50% from the one registered five years earlier.
The firm is currently Zacks Rank # 3 - Hold, and it also has a longer-term recommendation of “Outperfom”. For investors looking for a Zacks Rank # 1 – Strong Buy, Dealertrack Technologies Inc (TRAK), Open Text Corporation (OTEX), Pegasystems Inc. (PEGA) Solera Holdings (SLH) or Ultimate Software Group Inc. (ULTI) could be the options.
P/E, Earnings and ROE
In terms of valuation, the stock sells at a trailing P/E of 13.5x, trading at a premium compared to the industry. Earnings per share (EPS) decreased by 7.3% in the most recent quarter compared to the same quarter a year ago. Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has improved slightly when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:
As we can see, the firm has a higher ROE than the entire peer group.
As outlined in this article, the “go-to-market” strategies are jointly developed to help drive revenue. Moreover, the acquisitions we listed are vital to cloud computing, a fast growing segment. Finally, the additional stock repurchase authorization reflects the continued confidence and will provide a meaningful benefit to long-term shareholders.
I feel bullish about this company’s future profitability and I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in Q4 2013. Gurus like Paul Tudor Jones (Trades, Portfolio), George Soros (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and John Hussman (Trades, Portfolio) have taken long positions in it.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.
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Stocks Discussed: CA, TRAK, OTEX, PEGA, SLH,