Investors who are looking for technology stocks that offer strong cash flow, healthy balance sheet, and profitable margins with solid competitive edges can consider the following three companies: Oracle Corporation (ORCL), Cisco Systems, Inc. (CSCO) and Cognizant Technology Solutions Corp (CTSH).
Oracle Corporation is a provider of enterprise software and computer hardware products and services, including databases, middleware and applications. Software license and product support is the most profitable segment of ORCL's operation. ORCL closed at $34.56 with 1.54% loss on February 7, 2013. ORCL had been trading in the range of $25.3-$36.31 in the past 52 weeks. ORCL has a beta of 1.10.
In early February, ORCL announced the acquisition of Acme Packet Inc. (APKT) for $1.7B net of cash while the company is expanding into the networking equipment market long dominated by Cisco Systems Inc. Analysts believe Acme Packet is a good for ORCL because it expands existing ties with telecommunications providers, many of whom are already heavily dependent on Oracle's business management software and database for running their internal operations, as reported by Reuters.
On February 1, 2013, BMO Capital upgraded ORCL to Outperform with a price target of $43.00 (from $36.00). However, on January 25, 2013, Goldman Sachs removed ORCL to Buy from Conviction Buy list and raised its price target from $37 to $39. As reported,
"While Goldman sees upside to estimates in coming quarters given easier compares and moderating declines in the hardware business, they said the magnitude of upside risk has moderated somewhat near-term."
Fundamentally, ORCL has an enterprise value of $149.68B with a market cap of $163.62B. ORCL has a total cash of $33.70B with a total debt of $19.76B. ORCL generates a strong cash flow of $13.53B with a levered free cash flow of $11.55B. ORCL has a profit margin of 28.38%, ttm, and the return on equity is 24.66%, ttm.
Cisco Systems, Inc.
Cisco Systems, Inc. is the world's leading supplier of data networking equipment and software. CSCO provides a line of products for transporting data, voice, and video around the world, including routers, switches, access equipment, and network management software. CSCO closed at $21.09 with 0.45% loss on February 7, 2013. CSCO had been trading in the range of $14.96-$21.30 in the past 52 weeks. CSCO has a beta of 1.23.
Analysts, on average, are expecting an EPS of $0.48 with revenue of $12.06B for the current quarter ending in January, 2013. In the past 4 quarters, CSCO has 4 positive surprises. CSCO is expected to announce earnings on February 13, 2013. On February 8, 2013, Analysts at Citigroup increased their price target on CSCO from $21.00 to $24.00 with a "Buy" rating. On February 6, 2013, BMO Capital Markets also raised their price target on CSCO to $25.00 with an "outperform" rating.
Fundamentally, CSCO has an enterprise value of $83.35B with a market cap of $112B. CSCO has a total cash of $45B with a total debt of $16.33B. CSCO generates a solid cash flow of $11.62B with a levered free cash flow of $9.27B. CSCO has a profit margin of 17.90%, ttm, and the return on equity is 16.73%, ttm.
Cognizant Technology Solutions Corp
Cognizant Technology Solutions Co. is a provider of custom information technology, consulting and business process outsourcing services. The company serves clients primarily in North American and Europe with a focus on the financial, health care, and retail/manufacturing/logistics industries. CTSH closed at $78.51 with 2.94% gain on February 7, 2013. CTSH had been trading in the range of $53.92-$79.54 in the past 52 weeks. CTSH has a beta of 1.14.
On February 7, 2013, CTSH reported Q4, 2012 earnings per share of 92 cents, up 18% from the year-earlier quarter, beating analysts' estimates by a penny. Revenue jumped 17% to $1.94 billion, in line with the consensus view of analysts polled by Thomson Reuters. The company expects revenue to be at least $2.0B for the first quarter of 2013. Diluted EPS is expected to be $0.92 on a GAAP basis and $1.01 on a non-GAAP basis. Analysts are expecting revenue of $2.0B and EPS of $0.93 for Q1, 2013. The earnings call transcript for CTSH's management discussion for Q4, 2012 result can be accessed here at Seeking Alpha.
The company spent more than $480 million in share repurchases last year, capping $866 million in repurchases out of the existing $1 billion repurchase plan. The company is convincing clients to take SMAC, which stands for social, mobile, analytics, and cloud, a short-hand for all the buzz-terms currently in circulation. Cognizant had been investing in technology to make systems more SMAC-like for years, and is now finding the opportunity to actually sell it as a project to customers, as reported by Tiernan Ray from Barron's.
Fundamentally, CTSH has an enterprise value of $20.94B with a market cap of $23.57B. CTSH has a total cash of $2.63B with zero total debt. CTSH generates an operating cash flow of $1.10B with a levered free cash flow of $589.21M. CTSH has a profit margin of 14.34%, ttm, and the return on equity is 23.79%, ttm.
In short, investors should be able to hold these three stocks and sleep well at night with their solid fundamentals. For CSCO, conservative investors can review the upcoming earnings result before establishing the long-term positions.
Note: All prices are quoted from the closing of February 7, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.