Have you been paying attention to shares of Open Text (OTEX)? Shares have been on the move with the stock up 5.5% over the past month. The stock hit a new 52-week high of $42.41 in the previous session. Open Text has gained 29.9% since the start of the year compared to the 21.7% move for the Zacks Computer and Technology sector and the 34.3% return for the Zacks Computer - Software industry.
What's Driving the Outperformance?
The stock has an impressive record of positive earnings surprises, as it hasn't missed our earnings consensus estimate in any of the last four quarters. In its last earnings report on May 1, 2019, Open Text reported EPS of $0.64 versus consensus estimate of $0.59 while it beat the consensus revenue estimate by 0.61%.
For the current fiscal year, Open Text is expected to post earnings of $2.98 per share on $2.88 billion in revenues. Meanwhile, for the next fiscal year, the company is expected to earn $1.59 per share on $3.02 billion in revenues. This represents a year-over-year change of 7.58% and 4.61%, respectively.
Open Text may be at a 52-week high right now, but what might the future hold for the stock? A key aspect of this question is taking a look at valuation metrics in order to determine if the company has run ahead of itself.
On this front, we can look at the Zacks Style Scores, as they provide investors with an additional way to sort through stocks (beyond looking at the Zacks Rank of a security). These styles are represented by grades running from A to F in the categories of Value, Growth, and Momentum, while there is a combined VGM Score as well. The idea behind the style scores is to help investors pick the most appropriate Zacks Rank stocks based on their individual investment style.
Open Text has a Value Score of C. The stock's Growth and Momentum Scores are B and D, respectively, giving the company a VGM Score of B.
In terms of its value breakdown, the stock currently trades at 14.2X current fiscal year EPS estimates. On a trailing cash flow basis, the stock currently trades at 16X versus its peer group's average of 26.7X. This isn't enough to put the company in the top echelon of all stocks we cover from a value perspective.
We also need to look at the Zacks Rank for the stock, as this supersedes any trend on the style score front. Fortunately, Open Text currently has a Zacks Rank of #1 (Strong Buy) thanks to rising earnings estimates.
Since we recommend that investors select stocks carrying Zacks Rank of 1 (Strong Buy) or 2 (Buy) and Style Scores of A or B, it looks as if Open Text fits the bill. Thus, it seems as though Open Text shares could have potential in the weeks and months to come.
How Does Open Text Stack Up to the Competition?
Shares of Open Text have been rising, and the company still appears to be a decent choice, but what about the rest of the industry? Some of its industry peers are also impressive, including Microsoft (MSFT), Red Hat (RHT), and Intuit (INTU), all of which currently have a Zacks Rank of at least #2 and a VGM Score of at least B, making them well-rounded choices.
The Zacks Industry Rank is in the top 32% of all the industries we have in our universe, so it looks like there are some nice tailwinds for Open Text, even beyond its own solid fundamental situation.
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