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Long Live CA

|Includes: CA Inc. (CA)

I love when companies change their names. (sarcasm intended) Some do it to be cool, to appear more relevant to a younger generation. Hence Dairy Queen becomes DQ and Kentucky Fried Chicken becomes KFC. Apparently, the word “fried” didn’t go over well with focus groups.

We all remember Philip Morris morphing into Altria. Pay no attention to that tobacco company behind the curtain. No matter, it’ll always be Big MO to me. But, I digress.

Another company that got in on the name change trend is CA. The company formerly known as Computer Associates felt it was necessary to live down a questionable past. It was for good reasons. Under founder Charles Wang and eventual CEO Sanjay Kumar, Computer Associates was embroiled in one scandal after another: excessive compensation, nepotism, and finally a massive accounting fraud. This brought about the end of the Wang/Kumar era in 2004 and Kumar even went to prison.

And just like that, another acronym was born. A symbolic (but very real) break from the past. Ever since, CA has led a relatively quiet corporate life under the direction of CEO John Swainson. Lacking the drama of the past and sporting a 2 letter name, CA is easy to overlook. Most investors don't know that CA is a highly profitable software company. Now might be a good time to get acquainted.

The company’s shares are falling today, hit by a wall of supposed bad news. The stock was downgraded by MKM Partners (whoever they are). CEO John Swainson has announced his coming retirement. And finally this little passage from the Associated Press, which made me laugh out loud.

“Shares of CA Inc. fell almost 7 percent Wednesday after disclosing that it's on the hook for $14 million in severance costs for its chief executive, who will retire by year's end when his employment contract runs out.”
Sometimes investors get to see stupidity on display and this is one such instance. A CEO’s retirement and his $14 million retirement package are hardly worth a billion dollar haircut.

I love the phrase "on the hook". You'd think that $14 million was a death sentence. Is it even material? $14 million translates into 2 cents a share! CA has $3 billion in cash on hand and will generate over $1 billion if free cash flow this year. Come on AP!?!

To be clear, Mr. Swainson’s departure isn’t good news, but it is a signal that CA is ready to stand on its own. The fundamentals of this high quality company have not changed, regardless of what name it goes by. And unlike the previous management, this CEO is leaving behind a company to be proud of. His job is done!

Nonetheless, today’s price action just goes to show that a wide gulf remains between the perception and the reality of CA. $1 billion in lost market value? Absurd. This is an efficient market at work!

Buy CA. Computer Associates is dead.

Disclosure:  Long CA