mardi 13 décembre 2016

Not so great ROE stocks: Open Text (OTC.TO) (Part III)

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.

Momentum indicators:
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.

5 commentaires:

  1. Great work! This is a company with impressive earnings growth. Keep in mind that the R.O.E. can vary just on the amount of debt the company takes on.

    If you buy a house with a 25% downpayment and I buy the one next to it for 10% downpayment...if the houses DOUBLE in price and we both R.O.E. will be much higher just because I gambled with a shit-load of extra debt. (I would argue that you run a better ship. you are better at managing finances and controlling risks despite my higher r.o.e.)

    1. Yeah, that's what's not so good with OTC. Their ROE is still low and they have an important debt. Not a great mix.

  2. ROA is a fairer metric for comparison across the board I guess.. I like some companies like Moody's and Colgate with 20% ROA and infinite ROE. That's my type, and I would get a hyper-erection if their P/E ever fall under 15.

    1. On a period of 5 years, OTC beats CL easily and achieves about the same performance as MCO.

      On a period of 10 years, OTC kicks their ass big time.

    2. Yea, sometimes market value outperform business value "bigly", like Trump said. CL is always expensive like 40-50 times P/E and that's probably why its performance sucks.

      Btw OTC is looking good these day, average 3 year ROA about 11%, average ROE about 25%. Analyst forecast for ROA from 2017-2019 also hover around 11%. Thanks for bringing this to us, will keep an eye on it.