SAP AG (SAP) has been trading in a range this whole year and now that it is closer to the bottom of its range, I wanted to take a closer look at the stock to see if it is attractive at these price levels. Here are five points I looked at while researching SAP:
Valuation: The trailing valuation metrics imply that SAP is cheap as it is trading in the lower end of its 5 year valuation metrics. SAP’s current P/B ratio is 4.0 and it has ranged between 3.0 and 8.8 over the past 5 years. SAP’s current P/S ratio is 3.3 and it has averaged 3.9 over the past 5 years with a high of 5.5 and low of 2.6. SAP’s current P/E ratio is 17.2 and it has averaged 21.6 over the past 5 years with a high of 28.9 and low of 15.6.
Price Target: The consensus price target for the analysts who follow SAP is $61. That is upside of about 11% from where the stock is currently at. This suggests that SAP is fairly valued at these levels.
Forward Valuation: SAP is currently trading at 17 times FY12 EPS. SAP’s closest comp is Oracle (ORCL), which is trading 10 times next year’s earnings. This is much higher than other tech giants trade at. Cisco (CSCO) is trading at 10 times, Microsoft (MSFT) is trading for 9 times, Intel (INTC) is trading at 10 times, IBM (IBM) is trading for 12 times, and Hewlett-Packard (HPQ) is trading at 6 times. The average forward P/E ratio for the five tech stocks is 9. This suggests that SAP is overvalued at these levels.
Dividend: SAP pays an annual dividend and has paid one since 1988. Its last dividend was paid on May 23, 2011 and was 82.5 cents a share for a dividend yield of 1.5%. Translated into euros as SAP is based on Germany, the dividend was a 20% increase over the prior year.
Earnings Estimates: SAP beat earnings estimates its last two quarters after missing 1Q11’s estimates. The 2Q11 earnings beat was 2 cents while the 3Q11 beat was 8 cents. If the company is able to report earnings with an 8 cent beat, that should provide a positive catalyst to the stock.
Price Action: SAP has had an up and down year. In the first part of last year, the stock rose over 26% to over $67 a share before it pulled back all the way to below $48 during late summer and late fall. Then the stock rallied again to the $63 level and then pulled back again, and is now trading at around the $55 level. The stock is now below its 50 day and 200 day moving averages. The 50 day moving average sits at just below $57 while the 200 day moving average sits just below $58 a share. On the upside, $55 should serve as a key resistance level followed by the $60 level. On the downside, $52 should serve as support followed by $48.
Conclusion: SAP looks overvalued here as it is trading at a significant premium to other tech giants and low upside from analysts’ consensus target. It is probably better to take a closer look at Oracle or other tech giants to add to your portfolio.