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Summary

  • TIBCO Software may not pop up as a possible undervalued situation, when screened by P/E, but closer examination points us to this conclusion.
  • Information Technology sector is frequently cited as industry where near-term relative outperformance is likely and now holds the largest weighting in the S&P 500 index.
  • But "Big Data" firms specializing in business analytics have lagged both the IT sector and broader markets during 2014.

Valuation Anomaly

TIBCO Software's (NASDAQ:TIBX) shares are shown to trade at TTM P/E multiple of 42.1x based on GAAP EPS of $0.51, according to Yahoo!Finance. On a non-GAAP basis (excluding amortization of intangibles, stock-based compensation, acquisition related expenses, non-cash interest related to convertible debt, restructuring, and adjustments to taxes) TIBX earned $1.07 over the past twelve months, implying a 21.1x P/E. My reason for highlighting this is not to debate whether or not to use GAAP but to illustrate that without some digging TIBX is not likely to pop up when screening for undervalued stocks.

Screen Used

I found TIBX through the following screened parameters:

  • Market capitalization greater than $2 billion
  • Component of IT industry/sector
  • Price-to-Sales ratio less than 5
  • Most recent quarter's operating margin higher than 15 percent
  • Share price at least 20% below 52wk high
  • Annual EPS figure is positive

Recent News

Last week on May 27th, TIBX's shares surged +6.4% for the day. The Fly on The Wall attributed the bounce to the DealReporter relaying that Der Aktionaer, a German publication, had reported that SAP was cozying up to TIBCO as a possible acquisition target.

On May 13th, TIBX announced via a press release that Jim Johnson was replacing Matt Langdon as the company's CFO.

Where's the Love?

The large multinational corporations that comprise a disproportionate amount of revenue to business analytic software providers like TIBCO's have been more disciplined in their capital spending objectives of late. This in turn has created a headwind for growth that investors have been discounting into these "Big Data" companies' share prices since last fall. So what were once fast growing companies will be lucky as an industry to hit high single digit revenue growth during 2014.

Why I find TIBCO's shares appealing post the recent surge?

There are two items that caught my eye regarding TIBX when I dug into their financial statements and a recent company presentation. First, their sales representative productivity has been on a negative trend since 3Q11. Hence, the new CFO may be the catalyst the company needs to address the issues that have hindered its sales staff over the past two years. Second, in 1Q14 (ending February) operating margins improved slightly, by 20 basis points versus 1Q13. This breaks a five consecutive quarter slump where quarterly operating margins fell from year to year.

Conclusion

While looking for a company in the IT sector that was a value play, it became apparent that the entire Business Analytics segment was languishing. It is difficult to say whether or not this industry has troughed from a valuation perspective. But I am comfortable with the notion that I am early to the party. A prudent investor may want to let the new CFO get a few quarters under his belt before establishing a position in TIBX shares.

Some other firms that you may want to consider if you are looking for exposure to IT in a beat up segment are Tableau (NYSE:DATA), Qlik (NASDAQ:QLIK), Teradata (NYSE:TDC) and Splunk (NASDAQ:SPLK). All are underwater on their share prices versus 6 months ago. I purposefully have not mentioned the larger names in computing and databases which are mega-caps and in my opinion fully vetted already.

Disclosure: I am long TIBX. 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: Head In The Cloud: TIBCO Software Illustrates Why You Need To Verify Fundamentals