Business software companies come in a variety of shapes and functions. While some offer support to areas like human resources, others can provide solutions to manage a corporation's travel department or entire accounting departments. In this article I look at five of these companies, and focus on their ability to be profitable investments. Specifically, I analyze Automatic Data Processing Inc (NASDAQ:ADP), CA Inc (NASDAQ:CA), Insperity Inc (NYSE:NSP), Paychex Inc (NASDAQ:PAYX), and SAP AG (NYSE:SAP). These companies represent a good starting point for analysis of current market conditions in the business software sector.
Automatic Data Processing Inc
Commonly known as ADP, Automatic Data Processing Inc. is anything but small. With over fifty thousand employees and a $26.5 billion market cap, the company provides outsourced business solutions in areas like HR, payroll and benefit administration. Trading around $54 per share, the price is in the upper limits of its 52-week range of $44.72 - $57.10, but almost 10% below its one-year target estimate of $58.50. ADP also pays a nice dividend of $1.58, good for a yield of 2.8%. The company deals with low volatility (beta of 0.72) and has a solid price to earnings ratio of nearly 20.
While Automatic Data Processing battles with Paychex Inc. for supremacy in payroll processing, it is using its abilities in other areas to impress its shareholders. ADP is joining forces with AdvancedMD and ChartLogic Inc. to offer a comprehensive, cloud-based system for sharing of medical records. While the company's year-to-year earnings were nearly 21% last year, it will be innovations like this that will drive it even higher. While its price to book 4.3 could make a major price increase difficult, I expect steady growth, coupled with a very good yield, to make ADP an excellent investment in 2012.
CA Inc. is a $13 billion company that designs, develops, markets and supports a wide range of information technology software. The company, currently trading at around $26.50 per share, has a 52-week range of $18.61 - $27.13, a one-year target of around $27.50. It pays a solid $1 dividend for a healthy 3.7% yield. The company has a price to earnings ratio of almost 15, and CA Inc. is known for outpacing the S&P500. On the strength of its 3rd quarter earnings announcement of a dividend increase, CA Inc. made a huge surge in January, increasing its share price by nearly 33%.
While this was great news for shareholders, an increase based on factors that can't be charted is a bit unnerving, especially when its projection for 2012 is flat. With that said, the company has a reasonable price to book ratio of just over 2, and investors are not going to ignore a 10.4% increase in revenue or a 31.5% climb in earnings. In addition, the debt to equity ratio is below 25 and the company's payout ratio is a healthy 10%. Although it would be tempting to rate CA Inc. as a sell, I am keeping it as a hold until the market pulls back and investors can see how the company responds.
Formerly known as Administaff, Insperity Inc. helps companies to improve their performance with a variety of human resources and business solutions to help enhance business performance. Trading at $30 per share with a 52-week range of $19.85 - $32.38, Insperity is like its competitor Paychex Inc., in that it has a dependency on the still-shaky employment market.
The good news for this company is that metrics like its one-year target of $38 and its price to earnings ratio of 30 suggest that there are continued gains to be made. Insperity has no debt, has repurchased nearly 700,000 shares of its stock, and authorized the re-acquisition of another 1.3 million shares. Add in the fact that the company pays a dividend of $0.60 (for a yield of 2%) and has seven straight positive earnings quarters, and I am ready to rate Insperity as a solid buy.
Only half the size of ADP, Paychex Inc. ($11.35 billion in capitalization) is still a major player in the payroll processing sector. Also offering human resources and benefits administration, the company compares very well with its rival, beating Automatic Data Processing in metrics like cash flow-to-assets ($0.0145 per dollar for ADP and $0.03 for Paychex), beating earnings (all four quarters in 2011 for Paychex and 3 of 4 for ADP) and dividend yield (2.8% for ADP and 4.1% for Paychex). Paychex is debt-free, and the company enjoyed year-to-year increases in revenue (up 6.6%) and earnings (a 4.9% increase).
In spite of the positives, there are some concerns about Paychex. The one year target for the company is actually a 3% decline in share price, compared to a 5.6% drop in 2011. The company has failed to out-perform the S&P 500 in the past five years, and its economic moat (payroll processing) is based on employment, something that has been lagging for several years. While the company is a major player in the business sector and pays a strong dividend, I am rating Paychex as a sell right now due to its sluggish growth and declining share price.
SAP is known worldwide as one of the premier business solution software packages available. This dominance has forced rival Oracle (NYSE:ORCL) to make a $1.9 billion offer to purchase enterprise software company Taleo in order to keep pace.
Although it is performing very well, there are a couple of factors working against SAP at the current time. Trading at $63 per share, the stock has a one-year target of $47.50, a decline which can be attributed, at least in part, to the competitive presence of Oracle. SAP does pay a dividend of $0.61 for a yield of 1%, but its anticipated share price drop is significant enough that I am rating the stock a hold.
Smart Business Software Options
Performance and profits make all the difference in this competitive business sector, and each company has positive and negative points. With that said, I think now is a good time to buy Automatic Data Processing Inc. and Insperity Inc., while holding on to your positions in CA Inc. and SAP AG. Paychex Inc. has struggled to get its performance up, leading me to rate it a sell.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.