Smart Guy Stocks

American Software Is Indeed Fairly Valued

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.