If you're looking for growth in the software industry, should you invest in Micros Systems (NASDAQ:MCRS) to reap solid benefits in the future?
Micros Systems, Inc. is a global market leader in the hospitality and retail industry sectors. The company manufactures and sells computer hardware, software, and services for the restaurant point of sale, hotel, hospitality, specialty retail markets and other similar markets. The company has soared higher as of late, but there could probably be trouble on the horizon for this company. That is because MCRS is now in overbought territory. This makes investors think that they may be better off exiting this stock before it flops to ground.
In this article, I aim to deliver a clearer picture on where MCRS currently stands. Our argument makes a largely fundamental case for suggesting whether this stock is a smart bet for your profits.
Stock Valuation Model
Before reaching any conclusion, let's analyze key statistics for Micros Systems. Here I'm going to use the "Stock Valuation Model" to find out whether MCRS stock is a right bet for your future profits.
The stock valuation model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock's expected risk and return. I am using different fundamental and technical factors in order to rank a stock.
1. Value Test
The bars below the main financial metrics indicate which value test components the company falls into when compared to the whole market. For example, if a stock has 3 bars colored for Earnings Yield, the company's earnings yield is between 40% and 60% in the market.
Financial data from YCharts on 1 August, 2013
MCRS has got a low value score (3/10), even below average value score. This value test indicates that company's earnings and assets are low compared to its market price. There is a good chance that MCRS stock could become a better bargain in the future.
2. Fundamentals Test
Fundamentals test allows us to look at the company's financial health at fundamental level. This type of analysis examines key ratios of any company to determine its financial performance and gives investors an idea of the stock value. In addition, the fundamental analysis helps investors expose positive and negative factors.
Let's look closely if MCRS fails any of ten tests shown below.
Based on data from YCharts on 1 August, 2013
MCRS currently has a strong fundamental score (9/10). Evidentially, the company looks strong, but investors should keep an eagle eye on failed test carefully for possible weakness.
3. PE Valuation Method
This valuation method corrects for any recent price appreciations for discounts by suggesting that the value of the company will be in line with its historical valuations based on PE ratios. It will indicate companies that have recently increased in price, without an accompanying increase in earnings, to be overvalued, and it will show companies with a recent decrease in price, without an accompanying decrease in earnings, to be undervalued.
Formula: Value = PE5 x EPSTTM
PE5 = The 5 year historical average of annual median P/E ratios, allowed a maximum value of 35
EPSTTM = The trailing 12 months of earnings per share
PE Method Valuation = $59.65
Based on MCRS's financial data taken from Ycharts, calculation of the company's value according to PE Valuation Method makes us suggest that a current fair value for Micros Systems stands at $59.65.
4. PS Valuation Method
The PS Valuation technique estimates stocks by applying a historical average of median Price to Sales Ratios to current trailing 12 months sales numbers. Investors should always check to ensure that they are comfortable with the estimated historical Price to Sales Ratio given information today before investing based on this valuation.
Many investors prefer to use sales numbers to estimate stocks since they are slightly more difficult than earnings to correct using accounting practices. This technique tends to overvalue companies (growth firms) that have historically traded at very high PS ratios, and tends to undervalue companies that historically traded at low PS ratios.
In order to help investors avoid unreasonable valuations, there is a set of maximum Price to Sales multiple at 10, even if the company historically has traded at higher values. If the intelligent investor has good reason to apply a higher multiple, they may choose to do so, but we will not publish numbers that high because they are rarely sustained.
Formula: Value = Price/Sales3yr x SalesTTM
Price/Sales3yr = 3 year historical average of annual median Price/Sales Ratios, maximum of 10
SalesTTM = The trailing twelve month sales per share
PS Method Valuation = $55.46
Based on MCRS's financial data taken from Ycharts, calculation of the company's value according to PS Valuation Method makes us suggest that a current fair value for Micros Systems stands at $55.46.
5. Valuation based on Historical Multiples
The valuation based on historical multiples calculates the average of PE Valuation Method and PS Valuation Method. Since the method is an average, it will tend to be less volatile than either of the individual valuation methods. As a result, it would be helpful to check the values given by each of the methods discussed above.
Formula: Valuation (Historical Mult.) = (PE Valuation + PS Valuation)/2
Valuation (Historical Mult.) = ($59.65 + $55.46)/2 = $57.56
We can find out that MCRS's stock price is 15.6% under its historical valuation.
The above-mentioned results of fundamental analysis suggest the following: at a price of about $48.73, Micros Systems's stock is well undervalued. Fair stock price valuation indicates that currently undervalued MCRS stock has at least 16% upside potential to reach its fair value. Earnings and assets are low compared to price; that indicates this stock could become a profitable bargain in the future.
Despite this, Micros Systems currently looks strong in its financial health, shareholders should keep an eagle eye on dividend payment consistency (the failed test item) carefully for possible weakness in shareholder's earnings.
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.