All That Is Wrong With SAP

| About: SAP AG (SAP)

When a company delivers record revenue showing year-on-year increase of 16% and shows consistent revenue growth and earnings per share of $3.09 with prospects of more than 13% EPS growth next year; what does the market do? Well! It sits up and takes notice.

That is exactly what the market has been doing with SAP AG (SAP) - the stock has gained 20% in one year. Apparently, there has been good buying on the counter as the company's average traded volume is 1.29 million shares. The stock has fallen 6% in the last one month in the run up to its earnings date for first quarter fiscal 2013 (April 19, 2013). This article tries to understand whether the current decline in share price is an opportunity to buy.


SAP is a software and programming company whose core business is selling licenses for software solutions and related services. Solutions offered by the company cover business applications and technologies including industry-specific applications. Business Suite applications of the company include enterprise resource planning, customer relationship management, product lifecycle management and supply chain management. SAP also provides solution portfolios for end-to-end business process support, delivering tangible business and IT value for functional areas and across the extended enterprise.

This week, the company announced the latest version of SAP Sybase Replication Server, a core component of the company's Real Time Data Platform that helps ensure that critical information required by customers is available where and when they need it.


For the year ended December 30, 2012, SAP reported revenue of $21.39 billion, up 15.67% over prior year. The company has an astounding gross profit margin of 68%. SAP reported a net income of $3.72 billion at net profit margin of 17.43%. Its earnings per share are $3.09 and a dividend yield of 1.23%.

High margins are however normal in software and programming industry. The industry average is 69%.


With a market cap of $91.65 billion, SAP is a much smaller company than its competitors that include Microsoft Corporation (NASDAQ:MSFT) and Oracle Corporation (NASDAQ:ORCL), which have market caps above $150 billion.

Both Microsoft and Oracle have higher revenues, which should not be surprising considering their size- both companies have a workforce of above 90,000 against 64,000 plus of SAP. At the same time, both have higher profit margins as compared to SAP - 75% for Microsoft and 80% for Oracle. The same is true for net profit margins - 21.20% for Microsoft and 28.45% for Oracle. However, whereas Microsoft provides a dividend yield of 3.19%, Oracle's is 0.74%.

Is SAP a buy at this price?

Admittedly, SAP reported good revenue and has impressive profit margins. The company also announced a dividend raise for fiscal 2012. It shall now pay €0.85 or $1.11 per share as compared to €0.75 paid in 2011. However, in 2011 the company had also paid a special dividend of €0.35 in celebration of its 40th anniversary, taking the total tally to €1.10. The presence increase in dividend payout is 13% if the special dividend of 2011 is not taken into account.

However, the above data only indicates that SAP is a reasonably good dividend play. If the market keeps responding to revenue growth and high margins, the stock may also give a reasonable return on investment over the long term. SAP has been disappointing analysts continuously for the last four quarters but still returned more than 17% to investors by way of stock appreciation in the last one year.

However, a value investor is more concerned about current and future valuations, the two most important factors that investors need to consider before taking a call on a stock. At present the stock is trading at PE multiple of 24.90, which according to all standards is pretty high.

For first quarter 2013, results for which are to be declared on April 19, 2013, analysts are predicting an EPS of 53 cents down from 64 cent EPS and quarterly revenue at $3.88 billion, down from $4.46 billion reported for the same quarter prior year. However, analysts are more optimistic about full year results and anticipate earnings per share of $3.82 against the current $3.09.

Whereas the earnings growth for December 2013 is primarily negative, the company is expected to register 13.38% growth over the long term (five years).

Forward P/E ratio, for December 2014, is expected to be in the region of 20, which is also on the higher side. At the same time, it must also be said that the industry average P/E is 25.72, which reflects the market's faith in the technology sector, particularly software and programming industry. However, there are many other value picks in the sector; for example, Microsoft, which is trading at a much lower P/E of 15.82 and forward P/E of 9.26 offers better value for money than SAP.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.