Cloud-computing stocks often have sky-high valuations now. You can easily find stocks that have no current profit and which trade at 100 forward price-to-earnings ratio, or even a 400 forward P/E. Such valuations assume enormous growth that is probably not going to happen. That said, the cloud area is very attractive. There should be stocks that present good value in this area. There are a few, in fact, and I would like to tell you about one of them.
CA, Inc. (NASDAQ:CA) provides enterprise IT management software and solutions. The company has beaten analysts’ estimates by 23.6% in its most recent quarterly report. However, CA, Inc. (NASDAQ:CA) Technologies has issued downbeat guidance for the next year which kept some investors nervous. Earnings estimates for the current fiscal year have risen 12.2% during the last 90 days despite the guidance, however. Let’s see if this stock is worth your time.
Here’s why it’s worth your attention
There are two conflicting trends in the modern IT world. The first trend is that new things like the cloud, Big Data or software-as-a-service are very attractive and promising. Companies are rapidly developing new solutions that could change the business world. The second trend is that due to weakness in the world economy, companies generally have shrinking IT budgets.
In this environment, it’s important to search for companies that already make money and should continue to do so, and CA Technologies is one of them. The stock trades at 13.2 price-to-earnings ratio and a 10.71 forward price-to-earnings ratio. The company pays a dividend that yields 3.66%. CA, Inc. (NASDAQ:CA) operates in three main segments: Mainframe Solutions, Enterprise Solutions and Services. The Services segment accounts for less than 9% of total revenue. Mainframe Solutions brings the most cash, accounting for 54% of the company’s total revenue.
The problem with the mainframe segment is that it is not a high growth area. The company states that it’s going to be flat. This is just a profit engine for the company, but you could not expect growth from it. The company expects its growth to come from its Enterprise Solutions segment, and from enterprise portfolio management solutions that it offers in particular.
Competition
CA Technologies’ enterprise portfolio management product, called Clarity, competes with the likes of Oracle Corporation (NASDAQ:ORCL)’s Primavera and International Business Machines Corp. (NYSE:IBM)’s BPM. The competitive advantage for CA, Inc. (NASDAQ:CA) is that the company is much smaller and can focus on a finite number of its solutions. Oracle Corporation (NASDAQ:ORCL) trades at 15.71 price-to-earnings ratio and 11.57 forward price-to-earnings ratio, while IBM trades at 14.35 price-to-earnings ratio and 11.34 forward price-to-earnings ratio. The dividends that Oracle and International Business Machines Corp. (NYSE:IBM) pay to their shareholders are significantly smaller than the dividend from CA, Inc. (NASDAQ:CA) Technologies. Oracle Corporation (NASDAQ:ORCL) yields 0.71%, while International Business Machines Corp. (NYSE:IBM) yields 1.83%. Given the world-wide war on costs, portfolio management products could be an area that outperforms the overall market.
CA Technologies competes with IBM in its IT operations and management segment, where IBM holds a 18.2% market share while CA Technologies has 11.7% market share. The market looks mature in this area, and analysts do not expect the companies to gain any significant share from each other.
Bottom Line
If you want to have exposure to new technologies but do not want to take risky bets, CA Technologies is your choice. The company has attractive valuations and pays good dividends. The company has a very solid cash position. CA Technologies has $2.8 billion in cash and cash equivalents, while it has $1.3 billion of debt. The company is also active in repurchasing its own stock. It is currently authorized to repurchase $505 million worth of stock, which is always positive for the stock price. When the hype about smaller cloud-related companies settles down one can expect a flight to quality, and CA, Inc. (NASDAQ:CA) would benefit from that as well.
The article Consider This Technology Stock originally appeared on Fool.com and is written by Vladimir Zernov.
Vladimir Zernov has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines (NYSE:IBM). and Oracle. Vladimir 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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