BMC Looks Good Enough To Acquire

12/6/2010


  Recent Price
$44
  Dividend
$0.00
  Yield
0.0%
  P/E Ratio
16
  Shares (millions)
181
  Long-Term Debt as % of Capital
19%
  52-Week Price Range
$46.950 - $34.24

BMC Software ($44; BMC) shares have jumped 23% since August, following evidence of strong corporate spending and chatter that the company could put itself up for sale.

Takeover activity is heating up as technology giants rush to integrate hardware, services, and software systems for corporate clients. BMC, which helps clients manage data centers, could appeal to many suitors. Long-term maintenance contracts ensure steady, recurring revenue streams, while the licensing business generates fat profit margins.

BMC has strong ties with Cisco Systems ($19; CSCO) and Dell ($13; DELL), which package their servers with BMC software. Neither Cisco nor Dell would have much trouble digesting BMC, with a market capitalization of $8.1 billion. Nor would BMC's key rivals, IBM ($141; IBM) and Hewlett-Packard ($42; HPQ).

BMC also looks attractive on its own merits. Free cash flow rose in five of the last six quarters, and BMC now holds $1.48 billion, or $6 per share, in cash. Buybacks have trimmed the share count by 3% in the past year. And even after the latest rally, the shares remain attractively valued, trading at just 16 times trailing earnings, 22% below their three-year average and a 16% discount to system-software stocks in the S&P 1500 Index. Excluding its cash holdings, BMC's P/E ratio falls to 13. BMC is a Buy and a Long-Term Buy.

Business breakdown

BMC serves roughly 16,000 clients, including 90% of the Fortune 100. During the downturn, it helped many of those clients slash costs by analyzing server performance and automating tasks. Its software supports corporate data centers, the sleek rooms lined with racks of servers, backup power supplies, and other components critical to computer systems.

The company operates in three segments. Licensing (41% of revenue in the 12 months ended September) carries the highest profit margins and represents BMC's best growth engine. Following 7% revenue growth in fiscal 2010 ended March, licensing advanced 11% in the six months ended September. For the September quarter, BMC reported strong licensing gains across all geographic regions.

Maintenance, BMC's largest business (52% of revenue) has struggled to grow in the past year. But the services unit (7%) has seen sales jump 26% over the last two quarters, a solid rebound from a 10% decline in fiscal 2010.

Conclusion

BMC topped consensus estimates for per-share profits and revenue in the September quarter. Bookings of $453 million, the result of 32% growth in enterprise-service licensing, also impressed Wall Street.

In October, BMC raised its full-year guidance for per-share earnings and bookings. IBM's launch of a new line of mainframe computers should help sustain order growth.

Rising earnings estimates call for per-share profits of $0.80 for the December quarter, up 5%, and $2.98 for fiscal 2011, up 12%. BMC seems capable of exceeding those targets. 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 '10
0.82
vs.
0.66
+ 9%
41.51
-
34.24
15 - 13
Jun '10
0.62
vs.
0.59
+ 2%
41.27
-
34.58
16 - 13
Mar '10
0.65
vs.
0.64
+ 3%
40.87
-
35.55
16 - 14
Dec '09
0.76
vs.
0.64
+ 4%
40.73
-
35.65
16 - 14
Year
(Mar.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2010
1.91
2.66
0.00
40.87
-
31.00
15 - 12
2009
1.87
2.01
0.00
40.87
-
20.58
20 - 10
2008
1.73
1.51
0.00
37.05
-
24.77
25 - 16
2007
1.58
1.57
0.00
36.92
-
19.90
24 - 13
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
60
62
93
93
81
60

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


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