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Software Infrastructure: 16 companies, 4 investment ideas

December 20, 2010 | About:
In order to try and find some fertile ground for investments, I was going through the list of sectors in Morningstar and grew curious about softwares. Today I am reviewing the Software-Architecture industry. I have thus set up a screen to select companies in the “Software – Infrastructure” industry, with a market cap of over $0.5Bn.

This gives us a list of 16 companies, which I then filter against some of the criteria that I usually use in my stock reviews to try and evaluate business, balance sheet and valuation risk. You can find the spreadsheet on Google Docs.

1- Business risk

The first filter I apply is having a TTM ROE of 12% or more, which gets us down to 20 companies. Adding a second constraint of having a TTM ROA of 6% or more narrows the list of candidates to 6 companies:

- BMC Software (BMC)

- CA, Inc. (CA)

- J2 Global Communications (JCOM)

- Microsoft Corporation (MSFT)

- Oracle Corporation (ORCL)

- SolarWinds, Inc. (SWI)

2- Balance sheet risk

My preferred balance sheet criterion for a stock review is a debt / equity ratio below 1.0x. In this case, this does not change our list given that all of the 6 companies meet that criterion

3- Valuation risk

Not only am I looking for good companies, I am also looking for companies that are not too expensive. I thus add another filter of price to earnings (trailing) being below 20.0x; reducing the number of companies to 4 which I will add to my investment ideas and review in the coming weeks



Name Ticker % ROE

TTM
% ROA

TTM
Price/

Earnings

Trailing
% Cash/

Market Cap
BMC Software, Inc. BMC 33.6 9.81 18.21 18.48
CA, Inc. CA 15.78 6.51 14.9 21.31
J2 Global Communications, Inc. JCOM 20.64 16.14 16.98 16.98
Microsoft Corporation MSFT 46.73 21.79 11.05 3.71


You can find some investment ideas, more one-page “stock reviews” as well as more in-depth “stock analysis”, including valuation and copies of my financial model on my investment research blog: Margin of Safety Investing.

Many happy returns

Ben


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