A Software Standout's Troubling Treadmill by Sandra Ward
Summary: Why have BMC (BMC) Software shares more than doubled since mid-2005, putting BMC's P/E at 18, vs. industry norms of 11-12? Mainly due to the growth prospects of market leader Remedy network service software, and BMC configuration management database software. But investors may be ignoring: 1) Flatter software license sales, revenues and cash flow in contrast to earnings growth. 2) Much of its cash flow is generated through sales of its receivables, generally with lower valuations, making cash flow/share overvalued. 3) BMC's mainframe services are getting strong price competition from IBM (IBM) and Computer Associates (CA) combined with a shrinking client base. 4) Previous weak fiscal years magnify earnings results. 5) Its somewhat unorthodox practice of reporting long terms contracts as immediate, full revenues. 6) $34 shares might price BMC out of acquisition range. BMC has reorganized, cutting operational costs and sharpening its sales force focus between mainframe and non-mainframe operations, and its scandal-plagued competitor is struggling. But if momentum falters and cash flow reality kicks in, Walter Pritchard of Cowen & Co. says BMC could go to the high 20's—15% lower.
Related Links: BMC Software F2Q07 (Qtr End 09/30/06) Earnings Call Transcript; Software Stocks on Seeking Alpha