On Friday, October 5, analysts at Nomura upgraded shares of Informatica Corp. (INFA). The firm raised its rating on the stock from a Neutral to a Buy and set a $33.00/share price target. As a result of the upgrade, shares of INFA reacted quite nicely trading up as much as 5.24% in first hours of trading.
Should Investors Disregard Nomura's Recent Upgrade of Informatica? I strongly believe Nomura missed the boat when the firm upgraded shares of Informatica earlier today. That said I wanted to examine the company a bit further and take a look at how it compares to some of its industry-based peers in terms of several fundamental categories. The two companies within the semiconductor sector I chose to compare are IBM (IBM) and SAP AG (SAP).
As a whole, I've found that the Business Software and Services sector has one of the widest ranges of profit margins when compared to some of the other industries I've written articles on. That said the average profit margin of the three companies featured is a pretty moderate 17.70%. In the last 12 months Informatica Corp. has managed to demonstrate a profit margin of 14.33%, whereas direct competitors IBM and SAP have demonstrated profit margins of 15.34% and 23.44%, respectively. If we examine those numbers a bit closer we'll notice that Informatica Corp. is outpaced by both IBM (by a ratio of 1.07 to 1) and SAP (by a ratio of 1.63 to 1) and will need to find ways to improve on those margins if the company wants to compete with the likes of both ADI and TXN.
When we examine margins as a whole we need to do it in two parts, and with that said I wanted to comparatively examine the operating margins of the three companies featured in this article. That said the average operating margin of the three companies featured is a pretty admirable 24.04%. In the last 12 months Informatica Corp. has managed to demonstrate an operating margin of just 20.23%, whereas direct competitors IBM and SAP have demonstrated stronger profit margins of 20.82% and 31.07%, respectively. If we examine those numbers a bit closer we'll notice that once again IBM and SAP both outpace Informatica by ratios of 1.03 to 1 and 1.53 to 1, respectively.
Would I consider a position in Informatica based on the company's recent margin comparisons, in the wake of Nomura's upgrade? Although the company's profit and operating margins are somewhat solid, Informatica doesn't seem to outpace either of its competitors in this category, which makes me a bit cautious from this perspective. It should also be noted that, "Software maker Informatica Corp rattled investors with a warning on Thursday about worsening business conditions in Europe, sending its shares down over 25 percent." Based on both the recent news and the company's margin performance over the last 12 months, I'd actually look to see how the company performed in terms of returns (on both assets and equities) before making an investment decision.
Returns on Assets and Equities over the Last 12 Months
In the wake of a very poor showing on the part of Informatica, in terms of both profit and operating margins, there is one final comparison to examine, and that is the return on both assets and equities each of these companies have demonstrated over the last 12 months. The average return on assets by all three companies featured is a pretty mediocre 10.89%. Informatica Corp. managed to demonstrate a return on assets of just 7.56%, whereas IBM managed to demonstrate a return on assets of 12.15% (which outpaced INFA by a ratio of 1.60 to 1) and SAP managed to demonstrate a return on assets of 12.97% (which managed to outpace INFA by a ratio of 1.71 to 1).
The average return on equity by all three companies featured is a pretty mediocre 39.06%. Informatica Corp. managed to demonstrate a return on assets of just 11.64%, whereas SAP managed to demonstrate a return on assets of 31.19% (which outpaced INFA by a ratio of 2.67 to 1) and IBM managed to demonstrate a return on assets of 74.37% (which managed to outpace SMTC by a ratio of 6.38 to 1).
Do INFA's returns on both assets and equity strengthen the case for potential investors to establish a position? I really don't think they do, and if anything those numbers actually make me a lot more cautious than I was before. If we consider the fact Informatica has managed to demonstrate poor returns on top of even poorer margins over the last 12 months, we'll notice there really isn't much the company can do to substantially improve those numbers.
What can potential investors expect in the next 12-24 months? There are a few factors to keep in mind before establishing a position in INFA. The most important thing potential investors need to understand is the basis behind Nomura's upgrade. From a valuation standpoint I'm sure INFA looks attractive, but considering the fact that the stock just experienced a 25% sell-off the day before, doesn't anyone else think this upgrade is a bit mature? If a company announces a profit warning, where exactly is the upside? I don't think Nomura's upgrade is substantiated and for that matter I'd continue to avoid the stock at all costs.
Should potential investors consider a position based on the two fundamental comparisons I've presented in the wake of Nomura's upgrade? No. Based the comparative analysis I've presented, which demonstrates the fact that INFA's margins and returns need room for improvement, I'd remain very cautious on the company and stay in a very conservative holding pattern before reacting to the upgrade by Nomura. In my opinion, I'd want to see how the entire cloud computing sector reacts during the upcoming earnings season in an effort to determine whether or not the profit warning from Informatica was an anomaly.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.