Today: Open Text (OTC.TO). One of the favorites IT stocks of Jason Donville.
I've always thought it was pretty strange that Donville liked OTC and said whenever he had the occasion that he invested mainly in high ROE stock. LOL. Then, why did he invested in Valeant, Concordia, Pulse Seismic, Delphi Energy, Directcash Payment and Open Text? LOL. He was surely joking. Market Call is such a funny program.
Let's first say that OTC is actually buying Dell EMC's enterprise content division, for 1,62B$. It's a big acquisition because OTC has a market cap of about 10B$. There will be dilution, increase in debt and a lot of cash will go for this acquisition. In other words, the balance sheet is about to change a lot. But here are the actual numbers.
Beta: 0,76 (which indicates a good stability)
As we can see below, the growth is in fact very steady:
2011 EPS: 1,06$
2012 EPS: 1,07$
2013 EPS: 1,26$
2014 EPS: 1,81$
2015 EPS: 1,91$
2016 EPS: 2,33$
EPS growth from 2011 to 2016: 120% (great growth)
Few stocks achieve that kind of growth.
Actual ROE: 49 (significant tax benefit for the last quarter, so the number is impacted a lot)
Average ROE last 5 years: 13 (shit, this is low)
Debt VS earnings: About 10 times (medium-high debt level)
Shares: A little dilution and a little buyback here and there. A little more dilution, though. But not in an abusive way.
Sales growth last year: 13%
EPS growth last year: 2116% (significant tax benefit for the last quarter, so the number is impacted a lot)
Some interesting momentum here.
Actual PE: 9 (same reason as above: fucking tax benefit).
Forward PE: 19
Average PE last 5 years: 28
On an historical basis, the actual price is appealing.
Constellation Software performance last 5 years: 688%
Enghouse performance last 5 years: 390%
Kinaxis performance last 5 years: 364%
Open Text performance last 5 years: 187% (take note that OTC is actually the cheapest stock of that category, which wasn't always the case).
I like OTC. The beta is low, the growth is good, the sector is defensive. However, the ROE is pretty low and the debt is high. I'd wait to see what will happen with the acquisition before buying that stock. But I believe it's gonna be at least OK.