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In earlier articles, I explained why Microsoft (NASDAQ:MSFT) has 60% upside here and detailed the software-maker's opportunities in cloud services here. CA Technologies (NASDAQ:CA) is a competitor that similarly has promising opportunities, but has nevertheless struggled to execute on innovation.

From a multiples perspective, Microsoft is the cheaper of the two. It trades at only 9.5x and 8.6x past and forward earnings while CA trades at a respective 12.1x and 8.6x past and forward earnings. In addition, Microsoft has a dividend yield that is roughly 210 bps higher than that of its competitor at 3.1%. Gross margins are lower at 77.7% for the leading software company and have struggled to expand. While improved efficiency has yet to create meaningful value for CA shareholders, I am optimistic that integration efforts and reinvestment from strong cash flow will boost the upside enough to merit an investment.

At the second quarter earnings call, CA's CEO Bill McCracken noted decent results:

In the second quarter, we continued to expand our top line and improve our bottom line. As a reminder, our second quarter results reflects investments in the business, including a $44 million charge for our workforce reduction to better align CA Technologies resources with our market opportunity. We are investing in new technologies and acquiring new customers.

During the quarter, revenue grew 5% in constant currency and 10% as reported. Just over 3 points of this constant currency growth was organic. Mainframe Solutions grew 2% in constant currency and 7% as reported, while our Enterprise Solutions grew 9% in constant currency and 14% as reported. Including the $44 million expense, non-GAAP earnings per share decreased 1% in constant currency and increased 6% as reported.

Quarterly revenues were roughly in line with consensus at $1.2 billion, but growth going forward remains a concern - particularly in the area where new products are concerned. Positive bookings in Q2 were largely a result of renewals as opposed to innovation. New products for mainframe and enterprise solutions declined by a respective 10% and 20%.

With that said, current revenue backlog (which indicates demand) grew by 4%. The June 2011 acquisition of ITKO will unlock revenue and cost synergies and help to provide software that fully supports applications. In particular, LISA allows for developers to test app's performance in a simulated environment and represents a significant catalyst. Management is further anticipating 100 bps improvement in margins over the following three years. Finally, the company is also showing greater commitment to returning free cash flow to shareholders by accelerating the buyback program to $200 million in the second quarter.

Consensus estimates for CA's EPS are that it will grow by 11.4% to $2.15 in 2012 and then by 8.4% and 6.9% in the following two years. Assuming a multiple of 12.1x and a conservative 2013 EPS of $2.21, the stock has 32.9% upside. Even if the multiple were to plummet to Microsoft's and 2013 EPS turns out to be 9.4% below the consensus, the stock would barely budge. Accordingly, the firm is much safer than what the market recognizes.

Microsoft started 2012 with good momentum as revenue grew across all segments. The consumer PC attach rate to Office grew and global customers are indicating strong demand for the cloud-based Office 365. Unlike CA, Microsoft faces margin pressures, as was revealed by Windows 7. Although much talk has been made about Windows 8, it remains unclear whether this will do more to cut costs than its predecessor did.

Consensus estimates for Microsoft's EPS are that it will grow by 1.9% to $2.74 in 2011 and then by 10.6% in both of the following two years. Assuming a multiple of 14x and a conservative 2012 EPS of $2.95, the stock could potentially reach $41.30. Moreover, I find that technology innovator have little downside here.

Source: CA: 30% Upside Below Microsoft