VMware, Inc. (VMW) is set to benefit from the major shift to the cloud, with projects starting to be signed and more companies realizing the significant return on investment in moving to a cloud-based infrastructure, says Daniel Ives, Managing Director at FBR Capital Markets & Co.
“In terms of movement on the private cloud, with names like VMware, I truly believe a lot of projects are kind of in their early days of starting to be signed. I mean VMware is a name where — they’ve had a tough few quarters, but I think they’re well-positioned second half of the year, given you have more companies kind of making this move into the cloud through all these enterprise license agreements, those who are these larger license deals,” Ives said.
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Ives says that there has been a number of early cloud adopters in larger enterprises, and he expects a big shift in small- and medium-sized businesses as well, as more companies realize the cost savings. This positions VMW well in the second half of the year, Ives adds.
“From a pure ROI, it’s a game changer in terms of cost savings, because instead of a legacy hardware server-centric type of infrastructure, you’re moving to much more of a hosted virtualized environment, where there’s a lot of capex as well as opex cost savings. When you make that move there are some upfront expenses, but I think the ROI improvement is so meaningful that the shift will still be made. There are a lot of companies who are making the jump,” Ives said. “I think VMware is going to be a strong name in the second half of the year.”
Workday (WDAY) is a fairly recent entrant into the publicly traded software space, and in its short trading history it has garnered significant investor interest in its growth strategy, shedding light on wider investor appetite in technology growth, says Alex Zukin, Research Analyst at Stephens Inc.
“Tremendous interest. There’s a huge appetite for growth today. You’re seeing companies like Workday that trade at 15, 16, 17 times forward, one-year-out revenues and growing at 40, 50%-plus, and that to me demonstrates that there’s a significant appetite to be involved with growth names,” Zukin said.
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Zukin says software companies aren’t spending much on acquisitions given their high rates of organic growth, but their capital is finding its way into ways to maintain growth rates by hiring sales staff, marketing people and service people.
“Also often forgot about is, these systems still need to be implemented, these systems still need to be supported, and particularly when you’re hiring a tremendous amount of sales people and you’re growing customer after customer after customer, you want to make sure that your customers are happy, because the most important aspect of the SaaS model is customer happiness and retention rates,” Zukin says.
Heartland Payment Systems, Inc. (HPY) is expected to see continued organic growth, better same-store-sales-driven growth trajectory and higher incremental margins as the economy improves and and HPY continues to invest in new products and verticals, says Brett Huff, Research Analyst at Stephens Inc.
“We think that there is upside to organic growth for [Heartland] as well. That’s driven really by three things for this company. One is increasing the number of sales staff. In this past quarter they increased their sales staff pretty dramatically by over 40 or 45 people. The second thing is the same-store-sales-driven growth trajectory, and that we think will get better over time. From the roughly 2% now, we think that will go up over time simply as the middle market economy gets better where these guys have a lot of their customers,” Huff said.
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Huff also points to HPY‘s cross sales as a driver for its organic growth, as the company is investing in new products and verticals such as payroll and school payment processing. He also sees margin expansion potential for the company, with incremental margins better than the industry average.
“They are running at a margin of about 20% or so on EBIT, and we think the incremental margins can be much higher. Again, this is an example of one of those fixed cost businesses where we think the incrementals are better than the averages, particularly as HPY scales and grows the number of transactions that it does…We think the incremental margins on that particular sales strategy where they own their own sales people and control that relationship with the merchant; we think those incremental margins are better than the industry average,” Huff said.
Catamaran Corp (CTRX) has doubled the size of its company with last year’s acquisition of Catalyst Health Solutions, and has put out a guidance that shows revenues of $14.6 billion run rate with a suggested EBITDA of up to $670 million for the full year, says Mark Thierer, Chairman and CEO of Catamaran Corp.
“We’ve been growing the business very aggressively, both organically and through acquisition. Now in this last year we doubled the size of the company with the acquisition of Catalyst, and came together to form Catamaran. We believed it was the perfect time to reposition the company, rebrand the company and emerge as a truly scaled alternative to the more traditional models in the pharmacy benefit management industry. So today, we are a $14 billion pharmacy benefit manager with a strong market presence in each of the important market segments in the pharmacy benefit management industry,” Thierer said.
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CTRX exceeded expectations on the earnings line in the first quarter and has since put out a full-year guidance, expecting the balance of 2013 to be strong for the company, Thierer says.
“We’ve put guidance out that suggests we will have revenues in the $14.2 billion to $14.6 billion run rate. We’ve suggested that EBITDA in the $660 million to $670 million range for the full year and reiterated that guidance on our last call. We are feeling good about the outlook for the rest of the year,” Thierer said.
Fidelity National Information Services (FIS) could see upside as its stock has been trading below peers’ multiples due to concerns to its exposure to Europe and the outlook for this bank and payments company changes after some quarters of organic growth, says Brett Huff, Research Analyst at Stephens Inc.
“Fidelity National Info Systems, we like a lot. We have liked this company for quite some time, really for two things. One is that it traded below its peers multiple both on free cash and EBITDA for quite some time for a variety of reasons, one of which we think it had European exposure that some people were worried about. People perceive there to be customer concentration where I don’t think there was any meaningful customer concentration, etc. I think they have — that particular reason they have started catching up with their peers in terms of valuation,” Huff said.
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Huff says FIS is the one core-processing provider that provides the most services to the very large banks in the United States, and those banks spend the most on technology.
“FIS has put up between 4% and 5% organic revenue growth over the past several quarters, and we think there is potential upside from that number over the next year or two at any particular juncture. And as I mentioned before, since these really trade on that organic revenue growth percentage, we think that could drive the stock up. The drivers of that potential upside to growth are a couple of them,” Huff said.
The Chief Legal Officer and Senior Executive Vice President of Macerich (MAC), a Santa Monica, California-based real estate investment trust, has been emptying his piggy bank and buying units of this retail mall owner. In a May 29, 2013, SEC filing and another on June 7, 2013, Thomas Leanse purchased a total of 1,500 units. When an attorney buys units of his own company, it is perhaps evidence of interesting business developments.
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In February 2011, Macerich was the number one mall REIT pick from Stifel, Nicolaus & Company. Nathan Isbee, a real estate analyst from Stifel, identified the ability of the REIT management to upgrade additions to their portfolio: “a very successful project that they just opened in 2010, which they had leased up through the worst of the downturn, the Santa Monica Place redevelopment on the Third Street Promenade. It totally transformed that asset, which was okay, but was never going to generate growth. They totally transformed it and opened it up to the Third Street Promenade.” On February 11, 2011, Macerich was trading at $49 per unit; today, the REIT fetches $62 per unit and yields just under 4%.
Dover Saddlery, Inc. (DOVR) is on track to accelerate store openings and dominate the equestrian retail market with high earnings predictability and returns on equity, says Peter Gottlieb, Chairman and CEO of North Star Financial Services Corporation, and Eric Kuby, Chief Investment Officer of North Star Investment Management Corporation.
“This is a niche business with high earnings predictability and returns on equity, run by a disciplined management team whose interests are aligned with shareholders, which we were able to buy at less than replacement value. DOVR is a specialty retailer in the equestrian markets. Through almost 20 retail locations around the country, as well as a catalogue and Internet business, DOVR employs a multi-channel strategy that dominates its market in the highly fragmented equestrian retail space,” Kuby said.
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Gottlieb adds that DOVR is still poised for major growth, with a near-term goal of opening 50 retail locations across the country as other major competitors in the space remain elusive.
“The runway for growth is still long, and as the economy continues to improve, the pace of store openings should begin to accelerate from a few a year to potentially double that. We do not feel like the market is fully appreciating the quality of the DOVR business, given that there is no other major competitor of size in the equestrian retail space,” Gottlieb said.
Alexander D. Goldfarb is the Senior REIT Analyst in the research department of Sandler O’Neill + Partners, L.P., and has long been an advocate for buying American Campus Communities (ACC). In February 2010, Mr. Goldfarb put his investment thesis succinctly: “Universities always raise tuition; they don’t seem to know what cutting cost is. So all ACC has to do is just draft behind those tuition increases. To me, that’s a huge growth area.” At the time, the REIT was trading at $26 per unit.
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Mr. Goldfarb reiterated his ACC bullish call in June 2012 and his REIT investment thesis with this comment in an interview in an October 2012 interview: “Real estate, even at today’s valuations, because you have positive spread between financing costs and acquisition costs, you can easily achieve those 8% targeted returns that institutional investors seek, and it’s just a very attractive sector.” Currently American Campus trades at over $39 per unit and has an annual yield of over 3.7%.
In a June 8, 2013, SEC filing, BlackRock (BLK) declared a 10.17% ownership in American Campus, and one of the Directors of ACC, Oliver Luck, has been emptying his piggy bank and purchasing some units, as shown by this June 7, 2013, filing showing a purchase of 496 units of the REIT. BlackRock institutional support and insider buying demonstrate continuing value for this real estate investment opportunity.
Acme United Corporation (ACU), best known by their Westcott brand name for clean-cut scissors and rulers, saw record earnings and sales this year driven by innovative engineering of its products and acquisitions of fitting companies, says Eric Kuby, Chief Investment Officer of North Star Investment Management Corporation.
“[Acme is] run by a terrific guy, the CEO Walter Johnsen, who has done a great job transforming the company. You think scissors and rulers and pencil sharpeners, and it doesn’t sound that exciting, but what he’s been able to do is put engineering into everything that they make to make it special. So they don’t just make a pencil sharpener, they make an innovative pencil sharpener that is so much easier to use; it’s vertical, not horizontal. Their scissors have a special coating on them that make them cut better,” Kuby said.
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Acme‘s CEO has also been buying companies who are in bankruptcy that make additional products with other distribution that fit in well at ACU, driving the company’s earnings and sales this year to record highs, Kuby says.
“They’ve done a fantastic job growing the company, putting a lot of R&D into these relatively mundane businesses. And again, this year had record earnings and sales,” Kuby said.
Insurance brokers Brown & Brown (BRO) and Arthur J. Gallagher & Co. (AJG) are expected to continue seeing organic growth, and conditions for these brokers seem to be improving and their strategies are riding on the domestic macro improvement, says Brett Huff, Research Analyst at Stephens Inc.
“Right now we like Brown & Brown the best, simply because we think that Brown & Brown has the most upside to gain from exposure units getting better. It tends to sell to the middle market of the United States. The middle market businesses generally have not led us out of this recession as they usually do, so we think they probably have the most organic growth and incremental margin upside yet to go,” Huff said.
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AJG doesn’t stay far behind, and this broker has implementing more efficient cost-management strategies and the growth and profitability prospects look promising for this company, Huff said..
“We also really like Gallagher, simply because they’ve been the best operators of the insurance broker group over the last couple of years with the earliest and best and most consistent organic growth. We think that’s a function of just their tight expense controls, and I think their sales execution has just been very good. We like them because we think they have a good amount of capital to deploy, and we think that the market in general is underestimating the amount of capital that they’ll deploy to buy additional growth and additional profitability,” Huff said.
