In the IT sector, major players fiercely compete for market share and they need to remain innovative in order to keep their clientele from migrating to competitors.
A stock in the spotlight
As one of the 100 Forbes’ “World’s Most Innovative Companies” for 2012, data storage provider NetApp Inc. (NASDAQ:NTAP), has caught investors´ attention, eliciting diverse opinions. News about the firm being a takeover target and providing the NFL with electronic data collection and security systems for the Superbowl have kept NetApp Inc. (NASDAQ:NTAP) in the spotlight. Although some analysts remain skeptical about the company’s short-term future, there are some good reasons to invest in NetApp Inc. (NASDAQ:NTAP).
Despite the growing concerns regarding NetApp Inc. (NASDAQ:NTAP)’s ability to beat its main competitor, EMC Corporation (NYSE:EMC), the market has shown that there is no need to, as more than one can co-exist. In fact, the company reported strong 2013 Q3 results, reinforcing this point.
Deutsche Bank recently recommended buying NetApp Inc. (NASDAQ:NTAP) as its current price of around $34 is below its 52-week high and the stock is expected to outperform the market. The consensus target price is fixed $40, up about 15% from the current levels.
The 17.1% operating margin reported for last quarter, mainly driven by diminishing operating costs, places the firm way above the Data Storage industry margin median. Decreasing margins and competitors in decline make a good cocktail for success, so, even though the company trades at a P/E of 24.73, 7 points above EMC´s 17.15, it still offers a compelling investment opportunity.
Competition is becoming limited to these two enterprises, as International Business Machines Corp. (NYSE:IBM), Hewlett-Packard Company (NYSE:HPQ), and Dell Inc. (NASDAQ:DELL) have been posting considerable declines in storage revenue. Given these circumstances, understanding why one of these firms would want to take over NetApp becomes easier.
An attractive opportunity
International Business Machines Corp. (NYSE:IBM), recently experienced a drop in stock price. Trading at a reasonable P/E of 13.26, it offers a 1.75% dividend yield, higher than 82% of the 234 companies in the Computer Systems industry. International Business Machines Corp. (NYSE:IBM), provides an attractive investment opportunity. Several reasons to believe in the firm’s growth can be listed:
Consensus estimates predict a 10.3% annual growth in EPS over the next two years, compared to its peers’ average of 13.3%. However, the long-term expectations of a 10.8% EPS growth rate are in line with its competitors. So, although short-term prospects are not extremely promising, the longer run outlook seems positive. With a forward P/E of 10.4x (Morningstar), the stock’s valuation is pretty low, thus providing a good entry point for investors.
As stated by Deutsche Bank analyst Chris Whitmore, “the combination of modest revenue growth, an ongoing mix up to higher margin products (SW), further productivity gains and buybacks should drive annual double-digit EPS growth over the next few years.” Given these circumstances, International Business Machines Corp. (NYSE:IBM)’s calculations to reach EPS of $20 by 2015 seem pretty realistic.
Over the past 10 years, International Business Machines Corp. (NYSE:IBM), has returned to investors, through dividend payouts and share buybacks, over 85% of the total free cash flow generated. This signifies an average of $10 billion repaid to shareholders each year (fiscal 2012 registered $15.77 billion returned to investors). Management has announced its expectation to buy back $50 billion in stock and return over $20 billion in dividends over the next five years.
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.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
