American Software Is Indeed Fairly Valued

There has been a lot of talk regarding American Software (AMSWA) on the Yahoo Message boards and in the MF Caps; everyone seems to think it's undervalued and a great "asset play." From further analysis, it is far from it. Here is the math:

AMSWA owns 88% of Logility (LGTY) = $165.8 mln
Cash on the books is $75.6 mln, but $30 mln is from LGTY, so net of $45.6 mln gives a value of $211.4 mln for AMSWA so far.

The last portion of the calculation would be AMSWA the company, separate from LGTY. In the last three years for AMSWA, performance has been dismal separate from LGTY, its net income has roughly been $3.16 mln, -$2.03 mln, and $3.82 mln. It has roughly 26.8 mln shares outstanding which leads to roughly $0.06 per share on average over the past three years. Maybe a P/E of 10 in the best case scenario gives a valuation of $0.60 for AMSWA solo. Here are the revenue calculations:

$7.89 valuation of cash on the books plus LGTY stake. Plus a valuation of $0.60 for the company itself suggests roughly a $8.50 valuation for each AMSWA share. With a P/E of 20 that yields roughly a $9.10. Regardless of how an investor values AMSWA by itself, the stock is fairly valued. The only reason AMSWA stock has been moving has been because of LGTY.

Disclosure: I don't have a position in AMSWA.

AMSWA vs. LGTY 1-yr chart:

Comments

[SmartGuyDH]

There has been a lot of debate on various message boards about how to accurately value AMSWA. A lot of the debate is whether to separate LGTY’s ~36M cash position out of AMSWA’s ~76M cash hoard. Although I’m no CPA, I believe that the I was incorrect in my initial calculation, and that LGTY’s cash should be broken out as it is already captured in LGTY’s valuation. Given that, I figure that AMSWA is worth 166M (88% of LGTY) + 40M (cash) = 206M + the value of the company. Last year, AMSWA’s own operations earned 3.2M in net income. Given that the business isn’t growing much, assigning a 12.5 PE seems appropriate, resulting in another 40M. That gives a total of 246M - AMSWA closed at 233M today.
But that doesn’t capture the full value, as AMSWA generates a ton of cash and pays out a hefty dividend. From a discounted cash flow perspective, if you assume that AMSWA (without LGTY) produces the same 7M in cash flow that it generated in 2007 into perpetuity, with a 10% discount rate, the present value is 70M, bringing the total fair value to 276M.

No matter how you dice it, AMSWA is undervalued at this point.

[AlexShadunsky]

Just another point to this story, interest income related to the cash position should be netted out, which will both revise net income and cash flow downwards. Also, their LGTY's holdings aren't risk free. There is not enough downside protection in this investment for it to be worth it, imo.