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Adobe Systems Incorporated (ADBE), CA, Inc. (CA): This Fast-Growing IT Company Is a Bargain

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The recent stock market rally has left many companies trading at relatively high valuations as a result of multiple expansion. While the tech sector hasn’t rallied quite as much as the broader market, many IT companies are nevertheless trading at quite pricey multiples. Of course, there are always exceptions. One IT company is trading at a discount to the market, despite impressive growth. CA, Inc. (NASDAQ:CA) looks like a solid bet at the moment.

Stock at a Glance

CA, Inc.CA Technologies is a diversified IT support company, operating in the segments Mainframe Solutions, Enterprise Solutions and Services. The company has around 13,600 employees and the stock has a market cap of $12.68 billion. Despite a beta of 1.49, the stock is just about flat over the last twelve months, up only about 3.6%. It furthermore yields a generous 3.5%.

Earnings History

CA, Inc. (NASDAQ:CA) has been growing its annual earnings steadily over the last few years, going from $0.88 in 2007 to $2.53 in fiscal 2013. Lately, the company has also been delivering strong earnings for its quarterly reports, with only two misses since Q1 2010. Moreover, the company’s earnings growth has outpaced the industry since 2009, with 2011 as the only exception. Let’s take a look at the most recent quarterly report.

For Q4 fiscal 2013, CA, Inc. (NASDAQ:CA) reported earnings of $0.68 per share, beating the analyst consensus of $0.55 by a fairly wide margin. This figure is up 20% year-over-year in constant currency. Top-line growth was somewhat problematic, though, with revenue down 3% as reported and 2% in constant currency, and with management citing a tough economic undercurrent. The best performing segment by far was Services, with a 6% increase in revenue. The company appears to be doing a good job controlling costs, which is contributing to earnings growth.

Industry Peers

As an IT and software company, CA Technologies competes with names such as Adobe Systems Incorporated (NASDAQ:ADBE) and Hewlett-Packard Company (NYSE:HPQ), both of which have not been delivering the same kind of earnings growth. Adobe Systems Incorporated (NASDAQ:ADBE) didn’t grow its annual earnings at all from 2011 to 2012, with EPS flat at $2.35. Despite beats in Q1 and Q2 of fiscal 2013, analysts are expecting only $1.44 for the full year. The 3-5 year growth outlook is only about 2.5%, far lower than CA, Inc. (NASDAQ:CA)’s 16.27%.

Hewlett-Packard Company (NYSE:HPQ) has been struggling badly over the last few years, mainly as a result of its poor hardware sales. However, the segments in which it competes with CA, Inc. (NASDAQ:CA) haven’t been doing too well either. For full year 2013, Enterprise Group revenue was down 10%, Enterprise Services revenue declined 8%, and Software was down 3%. Nevertheless, the stock has performed quite well in the last year, up around 24%.

Valuations and Metrics

CA Technologies looks like a steal at the moment compared to the industry. The stock trades at only 13.52 times trailing earnings, versus Adobe’s hefty 40.92 and HP’s negative multiple. CA trades at 2.30 to book, which is quite reasonable, and the return on equity is also good at 17.61%. The operating margin of 30% is higher than many other companies in the industry. Finally, the company has a fairly strong balance sheet, with $2.79 billion in cash and $1.43 billion in debt.

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