* All data are as of the close of Friday, November 28, 2014. Emphasis is on company fundamentals and financial data rather than commentary.
Most investors will by now already be aware of the impressive gains the technology sector has delivered over the broader market since the economic recovery began some 5.5 years ago, it being the fourth best performing sector out of all nine, according to SPDR's range of sector funds.
Yet, they may not be aware that one of the hottest industries within the hot tech sector is the Technical and System Software industry, it being one of those "behind-the-scenes" type of industries.
In the simplest of descriptions:
"Companies in this industry design, develop, manufacture, and market technical and system software. This type of software includes assemblers, compilers, file management tools, system utilities, and debuggers."
They may not market such consumer hotcakes as smartphones, tablets or social media portals, but their products and services are in very hot demand by all the companies that do.
Here's a brief breakdown of what the nation's top three companies in the space offer:
• VMware, Inc. (NYSE: VMW), headquartered in Palo Alto, California, provides virtualization infrastructure solutions from a software-defined data center, used by industry-standard desktop computers and servers across a range of operating system and application environments, including networking and storage infrastructures. It also empowers organizations to aggregate multiple servers, storage infrastructure, and networks into shared pools of capacity; aka cloud computing.
• Autodesk, Inc. (NASDAQ: ADSK), headquartered in San Rafael, California, offers computer-aided design applications for professional design, drafting, detailing, and visualization, including AutoCAD, one of the most used programs in the drafting and architecture fields. Its 3D software kits provide the ability to manage various phases of design and construction, including surveying, mapping, analysis, and documentation solutions, as well as animation tools for digital sculpting, modeling, animation effects, rendering, and composition.
• Concur Technologies, Inc. (NASDAQ: CNQR), headquartered in Bellevue, Washington, provides integrated travel and expense management solutions via cloud computing, aimed at assisting companies and their employees in controlling costs, saving time, and boosting productivity by streamlining expense, travel, itinerary, and invoice management processes. It also incorporates services that help manage expense reimbursement, expense report auditing, business intelligence, and invoice management.
Just how well has the industry been performing during this red hot 5.5 year bull market? As graphed below, since the economic recovery began in March of 2009, where the broader market S&P 500 index [black] has gained 205% and the Technology Select Sector SPDR ETF (NYSE: XLK) [blue] has gained 220%, VMware [beige] has risen some 340%, Autodesk [purple] has soared 420%, while Concur [orange] has skyrocketed 585%.
On an annualized basis, where the S&P has averaged 36.18% and the XLK has averaged 38.82%, VMware has averaged 60%, Autodesk has averaged 74.12%, while Concur has averaged an outstanding 103.24% per year!
Looking forward, the Technical and System Software industry as a whole looks poised to continue surging ahead of the broader market as tabled below, where green indicates outperformance and yellow denotes underperformance.
Over the next quarter, the industry's earnings are expected to grow at some 3.26 times the broader market's average. While next quarter portends a struggle with underperformance, the longer term looks to resume the industry's stellar growth, with earnings growing at some 2.14 times the market's average in 2015, and at 2.10 times over the next five years.
Zooming-in a little closer, however, the three largest U.S. Technical and System Software companies are expected to split perform more or less along the lines of their performance so far, as tabled below.
Concur is expected to lead the pack straight across the calendar, as its earnings growth tops them all, including the broader market's. VMware and Autodesk, however, appear to be running toward trouble this and the next quarters, with Autodesk contending with outright shrinkage and then stagnation. But 2015 looks great for all three once again.
Yet there is more than earnings growth to consider when sizing up a company as a potential investment. How do the three compare against one another in other metrics, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
A) Financial Comparisons
• Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
• Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recently reported quarter, Concur posted the greatest revenue growth year-over-year, while Autodesk reported the slowest.
Since Concur's earnings growth is not available, the metric will not factor in the comparison, though it is worthy to note that both VMware and Autodesk reported earnings shrinkage.
• Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three contestants, VMware operated with the widest profit and operating margins, while Concur contended with the narrowest, which were negative, denoting loss.
• Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
For their managerial performance, VMware's management team delivered the greatest returns on assets and equity, while Concur's team delivered the lowest, which were negative, denoting loss.
• Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, VMware provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, while Concur's DEPS over current stock price is lowest, and also negative, denoting loss.
• Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, VMware's stock is the cheapest relative to forward earnings, company book value and 5-year PEG, while Concur's stock is the most overvalued relative to all ratios.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
• Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
Of our three specimens, VMware offers the highest percentages of earnings over current stock price for all time periods, while Concur offers the lowest percentages in all periods.
• Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, Concur offers the greatest growth in all time periods, while Autodesk offers the least growth in all periods, even shrinkage in the current quarter.
• Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their high, mean and low price targets over the coming 12 months, analysts believe Concur's stock offers the least upside potential and greatest downside risk, while VMware's stock offers the greatest upside and Autodesk's offers the least downside.
• Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Autodesk is best recommended with 4 strong buys and 10 buys representing a combined 82.35% of its 17 analysts, followed by VMware with 7 strong buy and 20 buy recommendations representing 62.79% of its 43 analysts, and lastly by Concur with 1 strong buy and 2 buy ratings representing 21.43% of its 14 analysts.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below, you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… VMware by the cleanest victory in over 100 competitions to date, outperforming in 19 metrics and underperforming in 0 for a net score of +19, followed far behind by Autodesk, outperforming in 4 metrics and underperforming in 6 for a net score of -2, with all judges concurring on Concur's last place finish, outperforming in 6 metrics and underperforming in 23 for a net score of -17.
Where the Technical and System Software industry is expected to outperform the S&P broader market substantially this quarter, underperform significantly in the next quarter, and outperform significantly in 2015 and beyond, the nation's three largest companies in the space are expected to split perform in earnings growth, with Concur outgrowing all, VMware struggling near term before outperforming longer term, and Autodesk growing the least.
Yet after taking all company fundamentals into account, VMware computes the best financial results given its (ready for the list?): lowest stock price ratios, highest cash over market cap, lowest debt over market cap, highest current ratio, widest profit and operating margins, highest returns on assets and equity, highest EBITDA over market cap and revenue, highest diluted earnings over current stock price, highest future earnings over current stock price in all time periods, and best high and mean price targets (whew) - decisively winning the Technical and System Software industry competition.