CA Puts Squeeze On Clients' Costs

4/23/2012


  Recent Price
$27
  Dividend
$1.00
  Yield
3.7%
  P/E Ratio
12
  Shares (millions)
484
  Long-Term Debt as % of Capital
18%
  52-Week Price Range
$28.00 - $18.60

Corporate profit margins have been expanding since the recession. CA Technologies ($27; CA) is contributing to that trend. The company used to be called CA, and before that Computer Associates. But despite the three names since 2006, there is no confusion about why customers call on the company: Its software boosts efficiency and trims costs.

A broad base of customers — banks, manufacturers, retailers, and government agencies — use CA's security, storage, and automation software. CA also helps clients with cloud computing, which allows them to access a shared pool of computing resources, a concept akin to the way homes tap utilities for electricity.

CA has fattened its own operating profit margins in each of the last four quarters. With a 3.7% dividend yield and robust growth outlook, CA is a Buy and a Long-Term Buy.

Business breakdown     

U.S. sales (58% of revenue) grew 12% in the nine months ended December, offsetting weakness overseas, where revenue was flat excluding favorable currency exchange. Total bookings rose in the U.S. and Latin America but slipped in other foreign regions. The backlog stood at $8.08 billion at the end of December, up 2% from a year earlier and equivalent to nearly two years of sales.

CA separates its business into three segments:

• Mainframe solutions (55% of sales, 88% of operating profits in the nine months ended December) helps clients manage their mainframes and lower costs. Revenue climbed 7% in the nine-month period.

• Enterprise solutions (37%, 10%) sells security, service-automation, and cloud software. These products are expanding CA's exposure to emerging companies, those with annual revenue of $300 million to $2 billion. Enterprise sales grew 13% in the nine months ended December.

• Services (8%, 1%) offers consulting and training for clients using CA software. Sales jumped 18% in the nine-month period.

CA holds $1.03 billion, or $2.13 per share, in cash net of debt. Management plans to return 40% to 50% of free cash flow ($1.18 billion in the last 12 months) to shareholders through dividends and buybacks.

In January, the company hiked its quarterly dividend to $0.25 per share from $0.05 per share. Buybacks have lowered the share count by 4% over the last year and 10% over the last three years. Management also approved a new $1.5 billion share-repurchase program, enough to buy back roughly 4% of remaining shares, with $500 million to be spent in the March quarter alone. CA also expects to spend $300 million to $500 million on acquisitions annually through the fiscal year ending March 2014.

Conclusion

For the March quarter, CA is projected to earn $0.51 per share, up 6% on 5% higher revenue. The consensus projects 15% higher per-share earnings in fiscal 2012 and 11% in 2013.

At 12 times trailing earnings, shares trade 13% below their three-year average and 39% below their five-year average. An annual report for CA Inc. is available at One CA Plaza, Islandia, NY 11749; (800) 225-5224; www.ca.com.



CA TECHNOLOGIES
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Dec '11
0.65
vs.
0.50
+ 10%
22.55
-
18.67
11 - 9
Sep '11
0.51
vs.
0.48
+ 10%
23.50
-
18.60
12 - 9
Jun '11
0.55
vs.
0.45
+ 9%
25.12
-
21.22
13 - 11
Mar '11
0.48
vs.
0.37
+ 5%
25.68
-
22.23
14 - 12
           
Year
(Mar.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
4.43
1.92
0.16
25.68
-
17.70
13 - 89
2010
4.35
1.71
0.16
24.15
-
16.12
14 - 9
2009
4.27
1.62
0.16
26.68
-
12.00
16 - 7
2008
4.28
1.54
0.16
28.46
-
20.21
18 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
70
77
83
94
49
80

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.
   NM Not Meaningful.


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