The field of business process management (BPM) is getting crowded. Both established and new companies are engaged in a battle for customers. Products’ time to market is decreasing fast. In this environment, companies are turning to solutions that enable them to operate their processes as quickly as possible. One of the companies that provide BPM solutions is Pegasystems Inc. (NASDAQ:PEGA). Pegasystems Inc. (NASDAQ:PEGA) is a relatively small company with $1.2 billion of market capitalization. Despite the worldwide cut on IT budgets, Pegasystems Inc. (NASDAQ:PEGA) has managed to rise 43% year-to-date.
Smart strategy
When a small company tries to fight with a big company, chances are that it will lose. You need to produce something really game-changing to afford that. BPM systems do differ from each other, but none of them are totally different from another. Pegasystems Inc. (NASDAQ:PEGA) applies an interesting approach. Instead of fighting with the competition, it issues extensions that enable Pegasystems Inc. (NASDAQ:PEGA)’ BPM to work with products of other companies.
Pegasystems Inc. (NASDAQ:PEGA) has issued SAP AG (ADR) (NYSE:SAP) Extender and salesforce.com, inc.(NYSE:CRM) Extender. SAP AG (ADR) (NYSE:SAP) is the biggest provider of enterprise resource planning (ERP) systems. Nearly 80% of Fortune 500 companies use SAP AG (ADR) (NYSE:SAP) to automate their core processes. The main trait of SAP AG (ADR) (NYSE:SAP) is complexity. SAP AG (ADR) (NYSE:SAP) integration is a very difficult process. Pegasystems offers a system that makes an easy connect between SAP’s ERP system and Pegasystems’ BPM system.
Sure, SAP AG (ADR) (NYSE:SAP) has its own BPM system. In a lot of cases, SAP is a legacy system that has been around for a while, and it’s easier to implement Pegasystems’ BPM than to connect SAP products with each other.
salesforce.com, inc.(NYSE:CRM) is concentrated on customer relationship management (CRM) systems, so Pegasystems’ product does not compete with salesforce.com, inc.(NYSE:CRM) products. salesforce.com, inc.(NYSE:CRM)’s revenue grew 28% in the first quarter. Gartner announced that salesforce.com, inc.(NYSE:CRM) is the largest CRM platform in the world. The company is growing its customer base, and this is good for Pegasystems.
Points of strength
Pegasystems states that its business is strong in financial services, communication, and manufacturing. The company receives mush of its revenue from North America as well as Asia-Pacific. Europe remains problematic, however, it is problematic for almost every company in almost each industry.
Pegasystems has started Pega Academy, an online source of training on Pegasystems’ products. This helps cut training costs for the customers, as online training is cheaper than in-house training. In the meantime, such an initiative helps build customer loyalty. Customers who have devoted time and effort to learn the best practices in using the product are less likely to switch to a competitor’s product.
Valuation
Pegasystems trades at a forward P/E of 22 times. This is a conservative valuation given that Pegasystems is a technology company. For example, salesforce.com, inc.(NYSE:CRM) trades at 60 times forward P/E. A well-established SAP trades at 19 times forward P/E. Analysts’ full year 2013 earnings estimates for Pegasystems have risen 7.6% during the last 90 days. It reflects the company’s flexible strategy. Meanwhile, estimates for SAP have dropped 2% and estimates for Salesforce.com have stayed unchanged.
Technology stocks are rarely dividend-rich, and Pegasystems is not an exception. Its dividend yields a minuscule 0.37%. SAP’s dividend yields 1.07%, and Salesforce.com does not pay dividends. Pegasystems is trading at a relatively high 5.1 price-to-book, but it does not seem such high when we look at Salesforce.com’s P/B of 9.
Bottom line
Pegasystems is an attractive stock in the business optimization software world. While a lot of stocks have gotten to sky-high valuations, Pegasystems is valued conservatively. The company has a smart strategy that enables it take part in the possible growth of its competitors. The company has zero debt, which is good for financial stability. I do not expect explosive growth from Pegasystems. Instead, it would deliver stable results and profitability. Not bad in a world of shrinking budgets, right?
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool recommends Pegasystems and Salesforce.com. Vladimir is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article This Tech Stock Is Finding Its Way Through the Woods originally appeared on Fool.com is written by Vladimir Zernov.
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