Tibco Software: Now Is The Time To Speculate

Aug.26.14 | About: TIBCO Software, (TIBX)

Summary

Rumor of a potential sale sent shares up 7.5% in a single session.

Key parts of Tibco's business have been mismanaged, leading to poor earnings performance.

Negative estimate revisions and analyst downgrades are already baked into the stock price.

Hewlett Packard was prepared to pay in the high $30s to acquire TIBX a few years ago.

Background

Over the last year, Tibco Software (NASDAQ:TIBX) has preformed hideously, down 22.5% from its fifty-two week high of $27.15. The correction in share price is due to a host of reasons, including weak earnings growth, lowered guidance and overall mismanagement. However, on August 6, it was rumored that Tibco had began reaching out to potential suitors. This sent the stock up over 12% in intraday trading, with shares finishing the day up 7.5%. Now, with the initial buzz of the rumor mill behind us, is it time to begin speculating on Tibco Software?

Operational Performance

In the company's most recent quarter, Tibco Software reported softer than expected numbers highlighted by 3% revenue growth and a decline in non-GAAP EPS of 15%. The company posted increases in revenue from all business segments except for software (down 2% year-over-year). Management blamed the segment's earnings miss on lower than expected Spotfire sales, stating that the analytics part of the business has become too reliant on a "small set of high transactions." Many of these transactions were either delayed or downsized resulting in lower revenue and weaker than expected earnings.

Analyst Opinions

A lack of execution by TIBX has lead many analysts to downgrade the stock and lower their earnings expectations. In the last three months, Tibco Software has been downgraded by four firms to a hold. According to Yahoo Finance, the stock now has only two strong buy recommendations accompanied by one buy, 14 hold and one sell. In conjunction with the downgrades, analyst EPS consensus for the upcoming quarter have been lowered to $.18. This represents a negative revision of 40%.

Why It May Be Time To Speculate

Despite Tibco's subpar performance, the company still has very valuable assets and realizes they have been mismanaged. In fact, just a few short years ago, Hewlett Packard (NYSE:HPQ) was rumored to be preparing a bid that valued the company somewhere in the high $30s. This leads me to believe that the value is still there, however management has not executed well enough to realize it. Now with the stock losing the majority of its sponsorship from major firms, the pressure is being placed on CEO Vivek Ranadive and his team to make the changes necessary to unlock the true value of the business.

Changes have already been made boosting marketing funds for Spotfire, as well as creating an analytics unit that is comprised of both Spotfire and Jaspersoft. Management has also stated that they are attempting to change the analytics business model into one based on subscription. This will lead to more consistent and predictable revenues over time. In order for these changes to work, Tibco sales representatives are going to have to learn to sell to a broader audience, focusing on selling larger volumes of small transactions.

Takeover Candidate

In my opinion, the best possible outcome for Tibco Software would be a takeover from Hewlett Packard. CEO Meg Whitman has stated that she will be addressing the company's underperforming software segment, leading me to believe that an acquisition may be an viable option. With HPQ's world-class sales team and years of experience selling high volumes of small transactions, Tibco's fast data solutions business could be back on a path to growth in just a few short quarters.

As I mentioned previously, HPQ expressed interest in the company just a few years ago. Now, after two years of mismanagement, the company is valued by shareholders at $3.43 billion and has an enterprise value of ~$3.8B. With cash and cash equivalents of $14.47B on HPQ's balance sheet, an all cash deal to acquire Tibco Software is not out of the question.

Conclusion

The risk/reward ratio now associated with Tibco Software justifies a look as a speculative turnaround play. The downside on the stock is limited since both the downgrades and negative estimate revisions have already occurred, meaning poor performance is already baked into the share price. This leads me to believe that any upside surprise may send shares substantially higher. With estimates being cut by 40%, Tibco may actually be a candidate to beat earnings estimates. Adding this to the potential premium that a takeover bid could represent, I believe Tibco Software is worth speculating on.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.