SAP AG (NYSE:SAP) has many hedge funds enthusiastic about its stock and I want to see why. My analysis here is based on the common stock valuation ratios in the financial statements of SAP AG over the last five years.
An investor looks at valuation ratios to gain an estimate of valuation to ascertain the attractiveness of a potential or existing investment. The valuation numbers that I came across for SAP were very encouraging. Keep in mind, however, that this is just one of the many ways to analyze a stock.
The German technology firm recently announced that it would increase its annual shareholder distributions for the upcoming quarter. SAP AG will raise its dividend 85 euro cents (U.S.$1.11) per share.
An analysis of the valuation ratios of a company involves looking at a class of financial metrics to determine whether a firm's stock price is too high, reasonable or a bargain as an investment opportunity.
Source: SAP annual reports.
Market Value per Share divided by Earnings per Share [EPS] is the calculation used to obtain the price-to-earnings (P/E) ratio. The most well-known investment valuation ratio is the P/E ratio, which compares the current price of a company's shares to the amount of earnings it generates. The purpose of this ratio is to give users a quick idea of how much they are paying for each $1 of earnings. And with one simplified ratio, you can easily compare the P/E ratio of one company to its competition and to the market.
SAP's P/E ratio has been considerably higher than the industry average over the last five years and this signifies that investors are expecting higher future growth.
The Price to Operating Profit (P/OP) ratio is something investors like to analyze instead of the P/E ratio. This is because the P/E ratio is calculated using net income and therefore the ratio can be quite sensitive to things like capital structure and nonrecurring earnings.
In SAP's case, the P/OP ratio values portray to an investor that the tech firm will have rapid growth in the future, which matches the deduction obtained from analyzing the P/E.
Note: U.S. dollar in millions except for EPS and Operating Profit per share.
The numbers used to obtain the P/E and P/OP ratios are shown in the table above. These numbers are higher than its closest competitors over the last five years. SAP had gross revenues of about $21B and its revenue projections are also very good.
Like the P/E ratio, the P/S reflects how many times investors are paying for every dollar of a company's sales. SAP AG has a high P/S ratio compared to other firms in the industry and this actually makes it a less attractive investment. However, it must be remembered that the P/S ratio only offers another perspective that complements the other valuation indicators - particularly the P/E ratio - and is a worthwhile addition to an investor's stock analysis toolbox.
As for the P/B ratio, value investors utilize it to find discounted equities. The trouble with book value especially when attempting to value a technology firm is that it ignores intangibles like goodwill, brand name and intellectual property. SAP AG has a lot of asset value that is determined by intellectual property. The P/B ratio may have its drawbacks, but it is an easy-to-use tool for finding companies that are under or overvalued. SAP's P/B ratio is higher than the industry average and this is indicative of the high expectations that investors have for the tech giant.
Note: U.S. dollar in millions except for Sales per share and Book value per share.
SAP has a strong balance sheet and great revenue numbers over the last five years. The numbers used to arrive at the valuation ratios listed in the 'More Valuation Ratios' table are shown in the table above.
The numbers lag behind its closest rivals Oracle Corporation (NASDAQ:ORCL), International Business Machines Corp. (NYSE:IBM) and Microsoft Corporation (NASDAQ:MSFT). After all, the German tech firm has a much smaller market cap in comparison to its American rivals.
The trend that can be seen across the board is that large-cap tech stocks have continued to grow their assets and revenues rapidly over the past five years. There will always be tech booms and busts, but it is innovation that will lead the American recovery and the growth in China.
1 Data adjusted for splits and stock dividends.
2 Close price on the filing date of SAP AG's Annual Report.
The share price has continued to rise along with the number of shares of common stock outstanding. This is a very encouraging sign for investors.
Conclusion: Invest in SAP AG
SAP has become the most precious German firm despite revenue that's 20% of Siemens AG (SI) and one-tenth that of Volkswagen AG (OTCPK:VLKAY).
It is true that the stock price has dipped below its 20-day moving average [MA] and also the 50 day MA. But I see this pullback as a perfect entry point to buy more SAP shares.
It must be stated here that SAP is the world's ninth most valuable technology firm and the only European one in the top 10. Large-cap tech companies are always a great investment idea. After all, innovation drives the global economy.
Disclosure: I am long SAP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.