CA Technologies (CA) is a software and services company that trades at less than 8 times forward free cash flow. CA recently announced that it bought a cloud computing company for $330 million, or more than 8 times revenue.
CA's shareholder base consists of value investors. Three out of the top five institutional holders are value shops while the other two are index funds. Value investors do not want their money spent on cloud computing companies at eight times revenue. This is a slap in the face to CA's major shareholder base.
CA should use all its free cash flow to repurchase stock. CA could increase its EPS at an additional 11% a year by doing so, yet they continue to make dilutive acquisitions. Past acquisitions have shown little benefit, yet management continues down the same path.
There was a ray of sunshine in the CA press release as the company has spent $150 million this quarter on share repurchases, which is a $600 million a year pace. I was hoping for more but it is an improvement over last year’s $235 million in share repurchases. CA Inc. shares remain attractive but it is very frustrating to watch management waste money. An activist investor like Carl Icahn could do wonders for CA, by forcing management to return capital to shareholders rather than doing “pie in the sky” acquisitions.