BIg Blue expects to buyback some $50 billion in shares and $20 billion worth of dividends over the next five years. So what will support these strong returns for shareholders? International Business Machines Corp. (NYSE:IBM) expects key contributions from its Smarter Plant line and SaaS solutions. Management targets profits from software to make up 50% of total profits over the long term.
What do hedge funds think?
Coming into 2013, there were 47 hedge funds long IBM, which includes billionaire Warren Buffett. Buffett’s Berkshire Hathaway had a $13 billion position, which made up a whopping 17.3% of its 13F portfolio (see Buffett’s top picks).
Heading into 2Q, 34 hedge funds were bullish on Adobe, which was a 11% from the previous quarter. Most notably, Jeffrey Ubben’s ValueAct Capital had the largest position among major hedge funds, worth $1.4 billion and accounting for 15.4% of its total 13F portfolio (check out ValueAct’s top stocks).
Meanwhile, Citrix Systems, Inc. (NASDAQ:CTXS) had more hedge fund interest than Adobe with 36 hedge funds long the stock. This includes Partner Fund Management with the most valuable position, accounting for 7.9% of its portfolio (see Partner’s new stocks).
Valuation
Here’s where we run into problems with Adobe, but we do find another possible solid investment opportunity. Adobe trades well above its major software peers and other major tech companies on a P/E and P/S basis:
| Adobe | Citirx | AutoDesk | IBM | |
| P/E | 31.8 | 19.8 | 18.1 | 21.1 |
| P/S | 5.4 | 4.3 | 3.5 | 2.2 |
However, I don’t find the premium valuation justified. Adobe has under-performed the likes of Citrix and IBM over the past five years in terms of EPS and operating cash-flow growth:
| Adobe | Citrix | AutoDesk | IBM | |
| Historical 5-yr. EPS Growth | 6.5% | 10.3% | -6% | 14.5% |
| Historical 5-yr. Operating Cash Flow Growth | 1.4% | 13.6% | -1.8% | 6.4% |
| Expected 5-yr. EPS Growth | 10.5% | 16.5% | 13.4% | 9.7% |
What’s more is that Citrix has the best expected five-year EPS growth rate at 16.5%, but trades below Adobe on a multiples basis.
Bottom line
I like Citirx more than Adobe, especially after Adobe saw its stock pushed higher by over 5% last week. Now the software giant appears to be too expensive. Yet, Citrix has impressive expected EPS growth that should be driven by the rise in demand for desktop virtualization and cloud computing technologies.
Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Adobe Systems. The Motley Fool owns shares of International Business Machines.
The article It’s Time to Go Sour on This Software Company originally appeared on Fool.com and is written by Marshall Hargrave.
Marshall is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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