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Summary

  • The share price is starting to rebound.
  • The competitive pressures were overblown.
  • Citrix generates substantial free cash flow to equity.

The share price of Citrix Systems (NASDAQ:CTXS) is starting to rebound, which is what I have been looking for the past few months. Investors were too worried about competitive pressure from AWS (NASDAQ:AMZN) and VMware (NYSE:VMW); my view is that the companies compete in different verticals. Additionally, XenApp and XenDesktop are best-in-class solutions.

Looking forward, the forecast is for 10% revenues growth in fiscal 2014, as management begins to refocus on the core offerings, XenApp and XenDesktop. Also, there should be pull through from XenMobile to XenApp and XenDesktop. The trend to a mobilized workforce is just beginning and Citrix should play a critical role in helping IT to build out the mission-critical infrastructure.

Consequently, given the fundamentals of the firm, I strongly believe that Citrix is undervalued by about 28%.

Recent Developments

  1. Citrix added new security features, for highly regulated industries, to XenMobile.
  2. The native integration of CA SiteMinder with NetScaler SDX will deliver a unified, multi-tenant policy control point for mobile and cloud services.
  3. Citrix is supporting Intel Device Protection Technology, which enables enterprises to secure and manage Intel-based Android mobile devices.
  4. XenMobile is available for Samsung KNOX.
  5. ByteMobile Insight is a big data analytics solution designed to provide immediate, actionable intelligence for mobile operator monetization, marketing, and customer care organizations.

Business Summary

Citrix Systems designs, develops and markets technology products and services that enable information technology to be delivered securely on demand, regardless of location, device or network.

From the industry perspective, the outlook for the software industry remains bullish both near term and longer term. Software is projected to grow at a rate above global economic growth. The productive enhancements offered by the industry make it an attractive investment. Additionally, Citrix is well positioned within the industry as the company benefits from the mobility and security trends.

For the year ending (in millions of dollars except per share data):

2011-12

2012-12

2013-12

2014-12E

2015-12E

Revenue

$2,206

$2,586

$2,918

$3,210

$3,499

Gross profit

$1,913

$2,182

$2,416

$2,600

$2,764

Operating income

$417

$391

$381

$353

$385

Net income

$356

$353

$340

$313

$332

Diluted EPS

$1.86

$1.87

$1.81

$1.66

$1.77

Revenue is forecasted to increase 10% in 2014 on continued strength in license updates and maintenance as well as software as a service revenues. For now, revenues growth is forecasted to slow to 9% in 2015. Profitability margins are forecasted to continue to contract as management reinvests in operations. My diluted EPS forecast is towards the upper end of management's guidance, which is coincidental.

 

2011-12

2012-12

2013-12

2014-12E

2015-12E

Ending financial leverage

1.50

1.54

1.57

1.58

1.60

Cash ratio

0.63

0.69

0.50

--

--

Current ratio

1.16

1.28

1.06

--

--

The solvency position is strong and the liquidity is ample. That said, the WACC is higher than it needs to be. Management could increase financial leverage to lower the WACC and increase the valuation of the firm.

For the year ending (in millions of dollars):

2011-12

2012-12

2013-12

2014-12E

2015-12E

CFO

$679

$819

$928

$1,027

$1,120

Capex

$112

$123

$163

$185

$200

FCFF

$567

$696

$765

$842

$920

FCFE

$567

$696

$765

$842

$920

The forecast is for continued growth of cash flow from operations and free cash flow. Free cash flow to the firm is forecasted to increase 10% in 2014 and 9% in 2015. Given the low capex requirements, management could increase leverage to increase free cash flow to equity and return the capital to shareholders.

The quality of earnings during 2013 was good. About 15% of earnings were the result of accruals. Cash collected from customers was 7% larger than reported revenues.

The near term outlook for Citrix is bullish. The firm is expected to continue to grow in at least the high single digits. While the firm does face increased competition, market participants may not be appreciating the value added of Citrix's offerings relative to competitors. Lastly, XenMobile is likely to spark the pull through of incremental revenues from XenApp and XenDesktop.

Portfolio & Valuation

(click to enlarge)

Citrix is in a bull market of intermediate degree and a bear market of primary degree. This is the bounce that I have been writing about for the past few months. Truly, I expect this to be a sustainable bounce as investors start to realize that the competitive environment isn't quite as competitive as they feared.

Monthly expected return

Quarterly expected return

Monthly standard deviation of returns

1.76%

5.28%

11.27%

 

Intrinsic value estimates

Forward price multiples in base case scenario

Optimistic

$123.62

P/E: 47.74

Base case

$79.47

P/S: 4.65

Pessimistic

$35.32

P/BV: 4.04

  

P/CFO: 14.55

Citrix is undervalued by 28% in the base case scenario. Under that scenario, the firm would be trading at 47.7 times fiscal 2014 earnings and 4.04 times the end of year book value. Management continues to reinvest in operations; consequently, the price multiples are higher than they would be for a mature firm. Using conservative fundamentals estimates, Citrix is 28% undervalued.

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.

Source: Undervalued Citrix Is Starting To Find Bids