We reiterate our Neutral recommendation on Compuware Corporation (CPWR). The company’s cost effective initiatives and incipient buy-back activities are likely to partially neutralize the effects of the weak economic condition and ominous competition prevailing in the industry.
Compuware’s superior end-to-end Business Service Delivery approach helps IT organizations to move from a reactive and operations-oriented process to one that is proactive and business-driven, across both the distributed and mainframe environments.
In addition, the company is expected to achieve a leadership position within the industry through its advanced Gomez offering, especially designed for cloud-related services and Big Data trends.
The company’s primary objective is to provide user-friendly, technologically advanced services to its clients in IT organizations through its improved software as a service (SaaS), professional and application services portals. The company’s Application Performance Management (:APM) and Covisint solutions segments are considered as its key growth drivers. In the first quarter of fiscal 2013, the APM segment’s revenues surged 28% annually, led by the dynaTrace acquisition while Covisint recorded a revenue growth of 27%.
One aspect, which has forever been an integral part of Compuware’s total approach, is its desire to return optimum value to its shareholders through buy back activities. During the first quarter of fiscal 2013, Compuware spent nearly $15.4 million in buying back of nearly 1.7 million shares of its common stock. Hence, based on the company’s existing trends we can expect similar moves on the part of it in the upcoming quarters as well.
The company’s administrative and general expense in the first quarter of fiscal 2013 was $39.7 million down 4.3% year over year, indicative of its cost control measures. Huge cost reduction strategies are expected to post healthy operating margins of up to 26.5% in fiscal 2015 from 15.0% in fiscal 2012.
Although Compuware’s intent and advances towards meeting long-term goals are remarkable, we are, however, concerned about the intensely competitive landscape. According to management, the company competes with more than 40 firms in one or more of its offerings. Rivals include BMC Software Inc. (BMC), CA Technologies (CA), International Business Machines Corporation (IBM).
Additionally, the majority of the company’s software products are designed for use with IBM and IBM-compatible mainframe computers. As a result, the majority of revenue from software products depends on the customers’ continued use of IBM and IBM-compatible mainframe products.
Compuware generates a substantial portion of revenue from countries outside the United States. Hence, as the company establishes its operations internationally; it is highly exposed to foreign currency fluctuation; hurting financials.
Hence, until the situation ameliorates and a brighter picture appears on the scene, we consider it wise to maintain a sideline stance on Compuware. In the short run, we have a Zacks #4 Rank on the stock, which translates into a short-term ‘Sell’ rating.Read the Full Research Report on BMC
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