ClickSoftware: Strong Model, Good Execution

I would summit as an attractive proposition a company that is able to sustain a high rate of growth while contemporaneously increasing surplus cash without using debt. Implicit in the proposition is a business model which can achieve sales growth with only modest capital requirements from operations or investments in fixed assets.

ClickSoftware Technologies (NASDAQ:CKSW) is one such company; an effective user of capital. It sustains a high level of revenue and profit growth without reliance on outside financing, while building up surplus cash.

Strengthening operating performance are the company’s strategic relationships with outside parties (SAP and others) to expand sales. The net impact of these relationships is to leverage existing competence with the efforts of others to grow sales. Financially, this improves the ratio of Net-operating-profits-after-taxes/Sales (NOPAT/Sales). (My prior article and related comments may assist with background information on the valuation methodology and definition of the terminology used).

Not long ago, CKSW reported FYE 12/31/08 results. Implicit in the very positive results is the combination of the strength of the model and the capacity to execute (and sustained product demand).

The growth in Free Cash Flow (FCF) in 2008 was major, reaching $2.15 million for the year (my computation). The present value of a perpetuity of such FCF, growing at a rate of 11% at a 12% cost of capital (Weighted Average Cost of Capital) would equate to an Enterprise Value (EV) of $118.10 million. Adding to the EV the cash surplus of $31.2 million, and dividing the sum by the number of shares results in a $5.22/share stock value. This compares with the current market price of about $3.00/share.

Arguably, the valuation is conservative - the assumed growth rate of 11% is only a fraction of the historical rate of growth. Likewise, the estimated cost of capital could be lowered, given the relatively low beta and high cash surplus on the balance sheet.

Below I quote my recent comments on an article on CKSW written by another Seeking Alpha contributor, subsequent to the announcement of FYE 2008 results.

    “From this perspective; excellent quarterly and FYE performance.

    CKSW is firing in all cylinders. The world needs to take notice of the unique strength of the business model that allows the company to build up cash while maintaining sustained revenue growth.

    As soon as the analysts' reviews confirm what we already know, I expect a surge in the stock price.

    I hope the company continues to do what is already working --operating within its own core competence; expanding market coverage through external channels at minimal marginal cost, adding to the product offering, and keeping an eye on headcount and costs.

    My only concern is that the raising level of cash and abundance of acquisition candidates at discounted market prices impel the company to rush into an acquisition for the wrong reason. While I realize the problem of a substantial asset generating returns that are below the cost of capital, a corporate acquisition would represent a major investment decision not supported by a known CKSW competence.

    Disclosure: I am long on CKSW.”

As usual, please do your own due diligence.

Disclosure: I hold a long position on CKSW.