Teradata: Heavy Hitter In A Nine Month Slump

In the midst of a half year rip roaring rally, Wall Street took a wrecking ball to data warehousing and analytics company Teradata (TDC). Shares peaked at $81 last September, only to be cut down to $48 in the last few days. Back in the Fall of 2102, Teradata warned analysts there would be significant headwinds from cutbacks in IT spending in the Americas, and the Americas constitutes 60% of the company's revenues. The company has disappointed investors for three quarters now.

Belt tightening in the executive suites of Fortune 1000 companies continues to dog the information aggregator and facilitator. However, Teradata is not alone in this fiscal fog. The entire S&P 500 technology sector was up only 5% for the first half of 2013 in an overall market that increased nearly 15%. The best first half of a year since 1999. With earnings season a few weeks away, it's crunch time for the tech sector. Many enterprise technology companies (including Teradata), have been promising second half results since the New Year.

The ranking general at Teradata is CEO Michael Koehler, and during the company's most recent conference call, he states that last quarter may be the end of his company's slide to the downside:

• "We believe the Americas hit bottom in Q1. Looking forward, the funnel for large CapEx data warehouse opportunities in Q2 has increased sequentially from Q1, while the prior year, large CapEx, data warehouse revenue in Q2 declined sequentially from Q1."
• "The second quarter will be challenging for revenue growth in the Americas, but it should be a good improvement from Q1 in terms of year-over-year quarter comparisons."
• "The large CapEx revenue headwinds in the Americas will be less severe in the second half of 2013 than they were in the first half. Large CapEx revenue in the second half of 2012 was less than what it was in the first half of 2012."

There is flimsy scientific evidence as to how much growth can be expected from the "Big Data" sub-sector in Information Technology out to the end of the decade. Last year, Big Data was the flavor of the month with promises of 15% growth as an aggregate for the next five years from the majority of research firms. Some of the stocks in the sector made lightning-quick moves to the upside, and this includes Teradata which is considered to be one of the best, if not the best data warehousing company on the planet. Competitors IBM (IBM), Oracle (ORCL) and SAP (SAP) may have something to say about that, but there is little doubt that Teradta is a top notch organization.

What most of these research companies didn't anticipate was a really lousy year. Many investors got their pockets picked when they bought in at the apex of enthusiasm for the sector last Fall. Traders with an insatiable appetite for momentum put Teradata on the Investor's Business Daily top 50 stock picks during that time. I don't believe that Teradata will get back to the lofty price levels of 2012 for at least a few years. However, that doesn't mean a patient investor can't find a decent entry point if indeed they want to invest in a company and sector that is clearly out of favor.

Despite the bad year, one big thing I like about the company is that they've increased earnings per share at a healthy clip since they were spun off from NCR (NCR) in 2007. That includes 2013. In 2012, Teradata made $2.44/share. This year, that number is projected to be between $3.05 and $3.20, the low end of guidance, but an increase just the same. The stock closed at $50.23 on Friday, so that equates to a P/E ratio of 16.3 for the year if indeed management hits its targets. Except for 2008 and 2009 when the market crashed, this gives us a historically low Price to Earnings for the company. However, this is with a six month extrapolation of the data.

This is not a small entity. It resides in the S&P 500 with an almost 9 billion dollar market cap. Research and Development was a healthy $45 million for the quarter, so they are not standing still. Net cash flow was $243 million in Q1 versus $192 million the first quarter in 2012. Teradata is also flush with cash with $865 million on the balance sheet. During Q1, they also repurchased 1.6 million shares for $94 million. The organization has approximately $230 million of share repurchase authorization remaining.

If we examine the consensus analyst estimates on Yahoo Finance, we get the something that is inline with company guidance when it relates to earnings per share: $3.01 for this year, and $3.41 for 2014. However, like with most securities, there is a wide discrepancy between the low and the high projections. In fact, for you Teradata bears, Cowen recently issued an underperform with a $45 price target for the company. Not everybody is in agreement that this is where to put your money, at least in the near term.

Earnings growth has ground to a standstill this year with the average analyst calculation of just 6.3% for 2013. A far cry from the 18% annual average the company achieved since it went public. If we look out five more years, the sell side is projecting a 13.5% growth trajectory. We can make an assumption that's not happening until spending picks up for big ticket enterprises.

The time-honored technique of buying laggards like Teradata may be a good investing option if you like to bottom fish. The current trend is buying dividend paying defensive securities, and with good reason. It was only four years ago we had an entire system overload and subsequent crash. Enough time has passed that we may have sector rotations into cyclical companies in the second half of 2013. It must be noted, specifically about this company that there was a decline in deal sizes, and number of deals in the last quarter. If we get a repeat for Q2, the stock may go lower despite rosy guidance.