Shares of Progress Software Corp. (PRGS, Financial) are down 6% following the release of its third-quarter results after the closing bell on Sept. 29.
After factoring in Wednesday's pullback, the company's stock is up 20% since bottoming on March 18. However, it is still down about 16% this year, which means there could still be room left to run before the end of the year.
Nonetheless, the current share price appears to be overvaluing the company relative to the Peter Lynch earnings line.
In a statement, Chief Financial Officer Anthony Folger said Progress will be looking to increase dividend payments to shareholders for the third consecutive year. This could make the stock more appealing to investors going into the final quarter of 2020.
Highlights from recent quarter results
For the third quarter, Progress posted non-GAAP earnings 78 cents per share, which beat analysts' expectations of 77 cents. This also represents a slight improvement from earnings of 75 cents per share a year ago.
The company's non-GAAP revenue declined 4% year over year to $110.9 million, but topped expectations of $110.1 million.
Progress also raised its non-GAAP revenue and earnings expectations for the year. The company now expects to post non-GAAP earnings between $2.94 and $2.97 per share, up from the previous guidance of $2.82 to $2.86. The revenue forecast was revised to $452 million to $456 million, up from guidance of $433 million to $443 million issued three months ago.
Progress appears to be in a strong financial position after recording $230 million in cash at the end of the third quarter. Its leverage ratio of just 0.3 also gives it a lot of flexibility at a time of unpredictability due to the Covid-19 pandemic.
"With more than $230 million in cash at the end of the quarter and a net leverage ratio of 0.3X, we are well-positioned to continue to execute our strategy, support our core business," Folger said.
Valuation
From a valuation perspective, shares of Progress Software are currently trading at a price-earnings ratio of about 34.19. This appears to be relatively cheap compared to the price-earnings ratios of other software companies. For instance, SolarWinds Corp. (SWI, Financial) trades at a price-earnings ratio of 198.06, while creative cloud software giant Adobe Inc.'s (ADBE, Financial) equivalent is 58.90.
Even when we factor in projected earnings for the next 12 months, Progress still looks competitively priced at a forward price-earnings ratio of 11.29 versus SolarWinds and Adobe's forward price-earnings ratios of 18.52 and 42.02.
In summary, shares of Progress Software appear to be competitively valued compared to its industry peers. However, the Peter Lynch earnings line, which provides an intrinsic valuation of the stock, suggests that even after Wednesday's pullback, shares could still be overvalued.
Disclosure: No positions in the stocks mentioned.
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