Cadian Capital Management, a hedge fund managed by former Perry Capital technology portfolio manager Eric Bannasch, has reported a position of 3.1 million shares in LogMeIn Inc (NASDAQ:LOGM). LogMeIn is a remote access services and software company with a market capitalization of about $590 million (though over 270,000 shares are traded on average per day, and the current stock price is above $23, so there is plenty of dollar volume). Cadian’s holdings give it 12.6% of the outstanding shares of the company. The technology-oriented fund had not owned any shares of LogMeIn at the beginning of July 2012, and had reported owning 1.5 million shares at the end of September (check out more of Cadian’s stock picks).
LogMeIn’s revenue was down 12% in the third quarter of 2012 compared to the same period in 2011, about the same rate at which sales had declined in the first half of the year. However, the company has slashed its sales and marketing costs, to the effect that even with an increase in general and administrative expenses pretax income actually rose 14%. Again, this was about the same growth rate that LogMeIn Inc had experienced in the first six months of 2012 versus a year earlier.
However, even after these numbers have come in the stock looks quite expensive. The company earned 15 cents per share in the first nine months of 2012- and keep in mind this was after increasing its earnings, so the bottom line isn’t abnormally low- and as we’ve mentioned the stock currently trades above $23. Even optimistic sell-side projections for 201- analysts say that LogMeIn Inc will earn 81 cents per share this year- imply a current-year P/E multiple of 29. 20% of the outstanding shares are held short, showing that while Cadian is bullish a number of traders consider the stock overvalued. It’s possible that the valuation is being pushed up due to the potential of being acquired by a Microsoft Corporation (NASDAQ:MSFT) or an International Business Machines Corp. (NYSE:IBM), because the fundamentals don’t seem to support a price at these levels.
Even before the large increase in its holdings Cadian was the largest hedge fund holder of the stock at the end of the third quarter, according to our database of 13F filings. However, we did see two hedge funds managed by billionaires buying the stock during the quarter. At the end of September, David Shaw’s D.E. Shaw owned about 820,000 shares (find more stocks D.E. Shaw was buying) and Steve Cohen’s SAC Capital had 650,000 shares in its own portfolio (see Cohen’s favorite stocks).
What about other business software companies?
Citrix Systems, Inc. (NASDAQ:CTXS) and Progress Software Corporation (NASDAQ:PRGS) are two business software companies which we can compare LogMeIn to. Each of these stocks has a trailing earnings multiple greater than 30, so their valuations are high relative to historical performance as well. As at LogMeIn, analyst consensus is for quite a bit of improvement at these companies- even though Citrix and Progress are larger businesses- and so their current-year P/Es are closer to 20. However, we’re always wary of expectations of rapid rises in net income. In fact, both Citrix reported a double-digit percentage decrease in earnings in its most recent fiscal quarter compared to the same period in the previous fiscal year. While Progress’s net income was up sharply, a fall in revenue indicates that this performance might not be sustainable.
We think that LogMeIn is too speculative a stock to buy at this time. Much of the company’s valuation comes from the assumption of high earnings growth in the next two to three years (judging by, for example, the gap between the trailing and current-year earnings multiples) and the current growth trajectory seems to low to bear that out. We’d advise investors to avoid it.
Disclosure: I own no shares of any stocks mentioned in this article.
