According to a filing with the SEC from August 7th, Starboard Value owned 4.8 million shares of Progress Software Corporation (NASDAQ:PRGS), a $1.3 billion market cap company providing business operations software. The fund has now filed a new 13D which discloses that as of late October it had increased its holdings to a total of 5.6 million shares, giving it control of 8.7% of the shares outstanding. Starboard Value, managed by Jeffrey Smith, is an activist hedge fund which is estimated to have over $1 billion in assets under management. It tends to be overweight the technology sector. Starboard first crossed the 5% ownership threshold in January, when it wrote a letter to Progress’s new CEO explaining that it believed that the company was highly undervalued. It has been so bullish on the stock that it was the largest holding by market value in Starboard’s 13F portfolio at the end of June (find more top stocks from Starboard Value). The stock is down 1% year to date, however.
Earlier this month, Progress Software Corporation released its results for the company’s third fiscal quarter (which ended in August). Revenue was down 14% from the third quarter of the last fiscal year, which is roughly in line with the decline in sales that the company saw in the first half of the year. Perhaps unsurprisingly, lower revenues have led to lower margins at the software company and so in the first nine months of the fiscal year net income has been down to $11 million from $47 million in the same period a year ago. The third quarter did show a smaller decline than previous quarters, with earnings down 36%. These recent numbers aren’t great, though sell-side analysts are optimistic for the next fiscal year: despite a fairly high trailing P/E multiple, Progress trades at only 15 times forward earnings estimates.
Mariko Gordon’s Daruma Asset Management was another hedge fund that owned Progress Software Corporation at the end of the second quarter, reporting a position of 2.4 million shares (research more stocks that Daruma owned). Third Avenue Management, a fund with about $10 billion in assets under management that is run by value investor Marty Whitman, initiated a position of 1.2 million shares between April and June. See more stock picks from Third Avenue Management.
Two other smaller-cap operational software companies are Advent Software, Inc. (NASDAQ:ADVS) and Tibco Software Inc. (NASDAQ:TIBX). In their most recent quarterly report, each of these peers reported a double-digit revenue growth rate versus the same period in the previous year, and an increase in earnings as well. However, their stock prices have both declined at a double-digit rate in the last 52 weeks. They are not very attractively priced on a trailing basis, with P/E multiples greater than 30 in both cases, but as with Progress the Street is optimistic about 2013. Advent and Tibco trade at 21 and 18 times forward earnings estimates, respectively. We’re cautious about how much improvement is expected here, and even those multiples aren’t particularly attractive.
We can also compare Progress to larger enterprise software provider Oracle Corporation (NASDAQ:ORCL) and to International Business Machines Corp. (NYSE:IBM), which also offers comparable software. These larger-cap companies have much better valuations. Their trailing earnings multiples are in the 14-15 range, less than half that of any of the three smaller companies we’ve mentioned, with expected growth next year carrying Oracle to a forward P/E of 11 and IBM to a multiple of 12 times expected earnings. IBM’s earnings were flat in its most recent quarterly report versus a year ago, while Oracle’s were up 11%.
As a result, we think that Oracle and IBM are better buys than Progress or the more directly comparable software companies. In turn, Advent and Tibco are actually growing their businesses and look like better values than Progress, though we doubt that we’d recommend either in absolute terms.