CA Stands Strong Amid Weakness

8/17/2009


  Recent Price
$22
  Dividend
$0.16
  Yield

0.7%

  P/E Ratio
16
  Shares (millions)
540
  Long-Term Debt as % of Capital
22%
  52-Week Price Range
$24.67 - $12.00

Global technology spending is likely to fall in 2009. Against that backdrop, software developers such as CA ($22; CA) are better off than most tech companies.

CA, formerly known as Computer Associates, makes software that helps clients manage technology infrastructure. The products focus on security, storage, and application performance, a mix that tends to yield long-term contracts with stable revenue streams. Moreover, CA seems likely to gain market share via new products over the next year.

Wall Street expects CA to grow per-share profits 8% in fiscal 2010 ending March, followed by a 10% boost in 2011, and estimates are on the rise. CA, already a Buy and a Long-Term Buy, is being added to the Focus List.

Business breakdown

CA’s chief revenue stream, subscription and maintenance (88% of 12-month sales), has held up fairly well, with revenue down just 2% in the four quarters ended June. Sales at the professional-services segment (9% of revenue) fell 12%, while revenue from software fees and other operations (3%) rose 7%. After years of expansion into emerging markets such as China and India, international sales comprise 44% of total revenue. Unfavorable currency translation has weighed on recent results.

Total bookings climbed 11% to $5.25 billion in fiscal 2009 ended March, or 15% excluding currency translation. CA is now booking larger licensing agreements than it managed in the first few months of 2009. Bookings accelerated in the June quarter, jumping to $1.20 billion, up 16%, or 22% at constant currency. North American bookings grew 17%, while international bookings climbed 15%, or 32% at constant currency. The backlog grew 13% to $7.72 billion in the June quarter.

Clients with complex technology infrastructures, such as MGM Mirage ($8; MGM) and Nasdaq OMX Group ($22; NDAQ), are looking to squeeze more out of their technology departments while lowering labor costs. CA says many of its products pay for themselves in less than a year. CA estimates that it holds a 9% share of its addressable marketplace. The company believes that market could expand 33% to $61 billion by 2013. CA has also streamlined its own operations and initiated work-force cuts to lower operating expenses, efforts that could widen operating profit margins substantially in fiscal 2010.

Management projects modest growth for fiscal 2010 ending March, with per-share earnings up 3% to 10%, or 6% to 13% at constant currency. The consensus has risen near the high end of that range, as CA has a history of conservative guidance. CA has topped the consensus profit estimate in each of the past five quarters.

Conclusion

Looking to broaden its security portfolio, CA has completed two small deals since October, with two more in the works. CA boasts a strong balance sheet, holding $2.98 billion in cash, or $5.52 per share, versus $1.29 billion in long-term debt. Free cash flow has surged in recent quarters.

Trading at 16 times trailing earnings, CA looks attractively valued compared to its three-year average P/E ratio of 28 and the software-industry average of 24. An annual report for CA Inc. is available at One Computer Associates Plaza, Islandia, NY 11749; (212) 415-6844; www.ca.com.

 

CA
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Jun '09 $0.42 vs. $0.40 - 3% $18.60 -

$16.66

14 - 13
Mar '09 0.13 vs. 0.13 - 5% 19.18 - 15.13 15 - 11
Dec '08 0.40 vs. 0.31 - 5% 20.99 - 12.00 17 - 10
Sep '08 0.39 vs.

0.26

+ 4% 24.67 - 18.31 22 - 17
           
Year
(Mar.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $4.27 $1.29 $0.16 $26.68
-
$12.00 21 - 9
2008 $4.28 $0.94 $0.16 28.46
-
20.21 30 - 21
2007 $3.94 $0.21 $0.16 27.46
-
18.97 131- 90
2006 $3.80 $0.26 $0.16 29.71
-
26.04 114 - 100
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
98 88 83 86 87 90 65

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com