Several growth initiatives, “including its smarter planet and industry frameworks, growth markets, business analytics, and optimization and cloud computing have driven significant growth and generated high profit margins for the company” (Zacks) and are expected to produce, at least, another $50 billion in revenue by 2015. In addition, a more diversified business mix, productivity gains ameliorating operating leverage, and growing investments should boost the firm´s growth even further.
Various profitability and growth metrics look particularly encouraging at the time. Operating margin of 19.6%, net margin of 15.9%, return on asset of 13.9% and return on capital of 114.5% are all at 10-year highs, while Return on Equity of 88% is the best in the sector.
A stock with potential
BMC Software has witnessed an upward trend since the beginning of the year. BMC currently trades at $45.6, close to a 52-week high of $46.33. The rise was mainly driven by the news of a possible buyout for over $6 billion that would take the firm private.
Although some investors believe it’s time to cash out before the momentum passes, others are concerned about the workforce reductions announced this month that will result in approximately $33 to $38 million in (pretax) compensations and layoff expenses during 2013´s Q4 and 2014´s Q1. There are several reasons to believe that buying BMC now is a good idea.
For starters, their Enterprise Service Management Framework, central to their products, offers customers a simple but very effective and customized way to link IT operation management tools to vital business tasks and functions, thus creating a loyal client base, further attached to the company due to the high costs of switching. The innovative software offering combined with a strong market position will certainly drive BMC’s earnings in the future. In addition, this faithful customer base has been steadily increasing, not only as a result of the market expansion, but also at the expense of BMC’s peers.
Furthermore, pressure from Paul Singer’s Elliot Management, who owns about 9.6% of the firm’s shares, has put the subject of selling out on the table. Potential buyers include International Business Machines Corp. (NYSE:IBM) and Hewlett-Packard Company (NYSE:HPQ), both considerably interested in expanding their IT Management Software product offering and market share. If the acquisition takes place, investors would be significantly benefited, for the selling price is projected in the $52 to $60 per share range.
Bottom line
Although all of these IT companies offer considerable growth prospects, recommendations for IBM and NetApp tend to be neutral, while consensus recommends buying BMC, despite the stock offering the lowest upside. While price targets on BMC remain low, many analysts see plenty of growth potential in the aforementioned features offered by the company.
The article 3 Stocks Competing for Market Share in Information Technology originally appeared on Fool.com and is written by Victor Selva.
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