BMC Optimistic Despite Downturn

11/16/2009


  Recent Price
$38
  Dividend
$0.00
  Yield

0.0%

  P/E Ratio
19
  Shares (millions)
187
  Long-Term Debt as % of Capital
20%
  52-Week Price Range
$39.00 - $22.03

Pressured to prop up earnings despite lower revenue, many companies seek quick payoffs on their cost-saving initiatives. BMC Software ($38; BMC), which makes software for mainframes and other server computers, is happy to satisfy that need.

Rapid consolidation in the financial industry in the past year has left some companies with a patchwork of hardware and software. BMC finds ways to boost the efficiency of these systems, such as designing a single platform for companies to manage operations. The company also automates manual processes ranging from compliance systems at casinos to operations management for data centers.

BMC has weathered the recession fairly well and is on pace to improve sales for an eighth consecutive fiscal year. That solid operating momentum, combined with rising earnings estimates and a robust balance sheet, help earn BMC Software Focus List Buy and Long-Term Buy ratings.

Business review

Sales have advanced 3% in the past year, with growth in all three reported segments: maintenance (54% of 12-month sales), license (39%), and services (7%). These units encompass operations for both mainframe and enterprise-service management.

In the September quarter, BMC added 18 new mainframe customers. Mainframe bookings from new customers and new products rose 70% from year-ago levels. BMC also increased its average selling price for enterprise-service products.

Although customers remain cautious, BMC is optimistic about deals coming through the pipeline. The company says it is moving into a stronger stretch of the renewal cycle for mainframe contracts. As for larger deals, BMC sees customers’ interest in longer commitments increasing.

BMC relies on strategic alliances to compete with larger rivals such as Hewlett-Packard ($50; HPQ) and IBM ($127; IBM). Both Dell ($15; DELL) and Cisco Systems ($24; CSCO) include BMC’s software with their servers.

BMC continues to branch out beyond mainframes into software geared toward business-service management, one of the company’s chief growth drivers. Since August, BMC has bought two privately held companies in this field. BMC has spent more than $1.7 billion on acquisitions in the past seven years and seems likely to continue making niche purchases.

Acquisitions are funded by a virtually pristine balance sheet that includes cash of $1.21 billion, or $6.48 per share, nearly four times the amount of long-term debt. BMC deploys some of that cash to buy back company stock, with the share count declining more than 10% over the past three years.

Conclusion

In October, BMC raised the midpoint of its profit guidance for fiscal 2010 ending March by 7% to $2.60 per share excluding special charges, implying 15% growth. The guidance assumes modestly higher bookings and revenue.

Surging 42% this year, BMC shares have doubled the S&P 500 Index’s 21% gain. Despite these price gains, the shares trade at 14 times estimated year-ahead earnings, 28% below the three-year average forward P/E ratio. An annual report for BMC Software Inc. is available at 2101 CityWest Blvd., Houston, TX 77042; (800) 793-4262; www.bmc.com.

BMC SOFTWARE
Quarter

    Per-Share
     Earnings*

Sales
Change

      Quarterly
      Price Range

P/E Ratio
Range

Sep '09 $0.66 vs. $0.56 - 1% $39.00 -

$31.00

21 - 16
Jun '09 0.44 vs. 0.27 + 3% 35.76 - 31.18 21 - 17
Mar '09 0.45 vs. 0.50 + 3% 33.99 - 24.76 19 - 14
Dec '08 0.45 vs.

0.42

+ 6% 29.48 - 20.58 17 - 12
           
Year
(Mar.)

Sales
 (Bil.)

Per-Share
Earnings*
Per-Share
Dividend

52-Week Price Range

P/E Ratio
Range

2009 $1.87 $1.51 $0.00 $40.87
-
$20.58 27 - 14
2008 $1.76 $1.57 $0.00 37.05
-
24.77 24 - 16
2007 $1.58 $1.00 $0.00 36.92
-
19.90 37 - 20
2006 $1.50 $0.83 $0.00 23.85
-
14.51 29 - 17
             
————————————————— Quadrix Scores † —————————————————
Overall Momen-
tum
Value Quality Financial
Strength
Earnings
Estimates
Performance
94 76 65 97 81 86 57

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


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