Can Open Text Keep Up Its Winning Ways?

Aug.21.08 | About: Open Text (OTEX)

Results for Waterloo, Ont.-based business software maker Open Text Corp. (NASDAQ:OTEX) [TSE:OTC] topped analyst expectations for the eighth straight quarter yesterday, but some are wondering how much longer the run will last.

Open Text scored seven deals worth more than C$1-million in the three months ending June 30, helping to boost the bottom line. Below are some analyst takeaways.

  • Versant Partners analyst Tom Liston cautions that several companies in not North America, Europe and Asia saw earnings drop in the second quarter and says it is unknown how that will affect spending on things like software. “Macro data points are telling us we have to incorporate [earnings] forecasts in to our model - not simply draw a line through recent quarters and extrapolate it through the next few,” he wrote yesterday. Mr. Liston has a C$37 target on the company.`

  • Raymond James analyst Steven Li notes Open Text has seen its EBITDA margin grow to 25% from 19% in 2006, but questions whether that growth can continue. He says that much of the recent margin growth came from restructuring recent acquisition Hummingbird Ltd., and that necessary capital spending going forward may flatten margin growth. He has a target price of C$42 on the company.

  • RBC Capital Markets analyst Mike Abramsky – who has a C$44 target price on Open Source – thinks the company may get swallowed up by a larger competitor. “[The company] remains an attractive takeout candidate in our view, with estimated possible takeout valuations at C$50~$55,” he wrote.

  • Dushan Batrovic of Canaccord Adams continues to view Open Text as “a defensive software name with strong geographic/industry diversification and robust free-cash generation.” He has a C$40 target on the company.