Seachange International (SEAC) is a fallen angel from the dot.com craze a decade ago. Back in 2000, it traded as high as $76/share and, after staggering down to $5 in 2002, has basically dithered in a range of $5-$10 except for a brief run up to $20 in 2004. Many investment experts say to avoid stocks under $10 (most notably Investor's Business Daily), but I believe that some securities trading in the single digits are worth an examination. Apple was selling as low as $6 in 2003 and look where it is now. I am not suggesting an underdog like Seachange will the rise to the heights that Apple has, but may be in store for a second act, and we could see a renaissance in price.
I don't like to kick a stock when it's down, but Seachange is so unloved and down-on-its-luck that only three analysts cover it; two with favorable ratings and one a hold according to Yahoo Finance. To compound matters even worse, they just released 4th quarter and full year earnings for 2011 and Wall Street lowered the boom. The stock was down 7% to $8.65 in after hours trading immediately following the conference call. It has since bounced back twenty cents in the last two days. No great shakes. So what do I see so promising in it? Well, the future.
Seachange is the global leader in selling Video-On-Demand (VOD) hardware and software systems to large, worldwide cable and telecommunications companies like Comcast, Cablevision, Cox Communications, Virgin Media, Rogers, Viacom, ABC Disney, Clear Channel and China Central Television. If you haven't seen a retail video store like Blockbuster or Hollywood Video of late, it is because of disruptive technology like Seachange's VOD systems that made their business models obsolete. Why take a trip to the store to rent a movie when you can get it in your living room with just a click of the remote control?
Another business segment that Seachange excels in is local spot ad insertions into national broadcasts. In fact, 70% of operators use Seachange's ad insertion system, and this type of target marketing is only going to evolve as not only Big Brother collects more and more personal information about you, but as the television and Internet begin to merge. Going forward, all viewing will be on an interactive basis. It's happening already to some extent.
Not only will the company's interaction with the television increase profits in the upcoming years, but another growth driver is it's expansion into what is now being dubbed as a multi-screen offering by their customers, i.e., the personal computers, tablets and smartphones. In a 12/9/2010 conference call, president Yvette Kanouff stated: "...across every single operator they are very serious about doing multi-screen. The 90% priority is the PC as the second screen more so than mobile.".
With Seachange's new Adrenaline platform, they will be able to offer their middleware for carriers who wish to launch multiple screens such as the iPhone, iPad and Android. It's only a matter of time before these telecommunications companies and cable operators become larger by offering considerably more content for your mobile devices. If past performance and continuing business relationships are a factor, then Seachange will be a benefactor in this development.
In examining its 10-K, Seachange International sounds like a stock that is ready to make an incendiary move upwards. The only problem is, all hi-tech companies annual reports sound like their products are the next great thing with all of the colorful acronyms they employ. Let's face it, Seachange has experienced trouble executing. This is why the stock is so inexpensive and can't beat the street's expectations.
There are many reasons the stock has flatlined the last 10 years. One is a good one; that the company made many acquisitions to solidify their position as worldwide industry leader which put pressure on profits. The other is not so good in that their hardware division is in the red and puts a drag on earnings. They are attempting to combat this situation by recently releasing Axiom, software that is independent of their hardware that can be deployed to third party hardware platforms. I believe this is a step in the right direction towards increased profitability.
In its current composition, Seachange derives 65% of sales from software, 25% from hardware and the remaining 10% from media services which along with software is growing rapidly. According to a recent ValueLine report, international sales represent 45% of revenues with demand the strongest in Europe and the Middle East. Although they do business in Japan, it is not a large enough part of their business to have a huge impact on profits because of the current crisis, but I surmise may have a minute ripple effect on revenues to a small degree in the next year. I really like the fact they commit 25% of revenues to R&D. That borders on the high side for a company of any size, but is what a smaller hi-tech company wants to do when they are in innovation mode to compete against competitors with deeper pockets. Seachange's largest rival is Cisco (CSCO).
On a valuation level, Seachange looks very compelling at roughly $8.75/share. Bear in mind that because of the lack of analyst coverage, I am using ValueLine statistics to compute the numbers: price/sales is 1.1, price/book equals 1, price/cash flow comes out to 8.5 and price/earnings is a reasonable 14. That's a value stock. However, it needs to get a grip and execute before it might force a shift in investor sentiment and send the stock higher. This, coupled with the fact that the market as a whole may be under pressure in the near term taking the stock lower, makes me want to sit on the sidelines for the time being. With it's market leading position in its flagship products, this stock has more than a puncher's chance.
Monday, March 21, 2011
Saturday, March 19, 2011
Drilling Down With Informatica
Finally, after ten long years of clawing every inch of the way back, Informatica (INFA) is getting close to its all time high of $58/share during the dot.com bubble. It didn't stay at $58 very long because in one fell swoop, it collapsed to $3 just a few months later in early 2001. Last Summer you could have scooped it up for $22, but those days are over and the price has since mushroomed to close to $50.
I've been intrigued, not by the stock, but by it's sector of data mining ever since I became aware of it a couple of years ago. Data mining stocks haven't really piqued my interest that much because the main players are software industry behemoths IBM (IBM), Oracle (ORCL), Microsoft (MSFT) and SAP (SAP). The slower growing, larger companies aren't as compelling to me as their more nimble, smaller, faster growing brethren. Informatica fits that bill and recently caught my eye because it sits in the middle of the pack on the Investor's Business Daily top fifty stock picks.
As I've mentioned in earlier posts, equities that reside in the IBD 50 raise a red flag because they have a great amount of momentum behind them, and, are candidates for pull-backs. Some more severe than others. Think F5 Networks (FFIV) of late, or, going back a few years, Veriphone (PAY). I want to give Informatica more scrutiny because I think it may be in the right place for continued growth given the industry it's in, but, want to look at the other side of the equation, too.
Data mining companies basically facilitate the management of enterprise data warehousing and data integration software. Their products access and transform data from a large variety of legacy and cloud systems and deliver it to other data warehouses, transactional systems and analytic applications. According to Investor's Business Daily, they help: "...companies, governments and research institutions store, manage and understand the data they collect.".
To be more specific, I am going to paraphrase the Informatica 2010 10K and state: that during the past 20 years, companies have made large investments in process automation. The results are silos of data created by a variety of software applications such as: enterprise resource planning (ERP), customer relationship management (CRM), supply chain management (SCM) and in-house departmental operational systems. These applications have increased data fragmentation and complexity because they generate massive volumes of data in disparate software systems that were not designed to share data and interoperate with one another.
In addition to the more conventional enterprise applications, the recent onslaught of social networking and mobile computing in the workplace has increased corporate data even more. As Informatica CEO Sohaib Abbasi explains in the most recent conference call: "Relational database applications manage transactions. Social networking manages interactions. And the promise for social computing is for the enterprise to gain a competitive advantage by being proactive with current social data rather than being reactive with past relational data....The combined usage of by enterprises of social networking services such as Twitter, Facebook and blogging is doubling every year, resulting in the recent unprecedented explosion of data.".
How explosive? According to the incredibly persuasive Abbasi, Informatica's addressable market was $11 billion in 2005 and is expected to grow to $40 billion by 2013. I also saw some conflicting statistics by market researcher IDC that claims an 8.5% compounded annual growth rate for revenues in the market from 2009 to 2014. Not exactly an apples to apples comparison, but you get the drift.
No matter what industry data you wish to follow, the average analyst expectation for CAGR in the next 5 years for Informatica is 18.5% according to Yahoo Finance. With a current price of $47 and a P/E Ratio of 42, you get a PEG Ratio (price/earnings/growth) to the tune of 2.3. Not exactly nosebleed altitudes, but calls into question just how long the company can continue its impressive run, at least at the pace it has experienced the last six months.
In addition to valuation concerns, there is also the problem of competition. In a recent Standard & Poor's report evaluating Informatica, they specifically address the other players in the field, with the top 5 largest vendors captivating a 59.6% share of the market. Informatica ranks 7th, but only commands a 1.4% slice. It can be argued that this only gives them more room to grow, but it may also signal slim pickings going forward as companies like IBM, Microsoft, Oracle and SAP gain better traction with their more robust platforms. Informatica continues taking steps to broaden its offerings, but eventually, it may hit a ceiling.
If you are a momentum player, this may be a good place to park your money as Informatica has had the Midas Touch of late. I'm a believer that things return to the mean and if you apply this to their lofty P/E ratio of 42, you can probably bag this stock at a more reasonable valuation. Going back 5 years, Informatica's P/E ratio has typically been a more modest 26. Bear in mind that Informatica had a great 2010, so comparisons going forward will be more difficult. That, coupled with the fact that the market is currently under pressure, make me inclined to sit back and wait.
I've been intrigued, not by the stock, but by it's sector of data mining ever since I became aware of it a couple of years ago. Data mining stocks haven't really piqued my interest that much because the main players are software industry behemoths IBM (IBM), Oracle (ORCL), Microsoft (MSFT) and SAP (SAP). The slower growing, larger companies aren't as compelling to me as their more nimble, smaller, faster growing brethren. Informatica fits that bill and recently caught my eye because it sits in the middle of the pack on the Investor's Business Daily top fifty stock picks.
As I've mentioned in earlier posts, equities that reside in the IBD 50 raise a red flag because they have a great amount of momentum behind them, and, are candidates for pull-backs. Some more severe than others. Think F5 Networks (FFIV) of late, or, going back a few years, Veriphone (PAY). I want to give Informatica more scrutiny because I think it may be in the right place for continued growth given the industry it's in, but, want to look at the other side of the equation, too.
Data mining companies basically facilitate the management of enterprise data warehousing and data integration software. Their products access and transform data from a large variety of legacy and cloud systems and deliver it to other data warehouses, transactional systems and analytic applications. According to Investor's Business Daily, they help: "...companies, governments and research institutions store, manage and understand the data they collect.".
To be more specific, I am going to paraphrase the Informatica 2010 10K and state: that during the past 20 years, companies have made large investments in process automation. The results are silos of data created by a variety of software applications such as: enterprise resource planning (ERP), customer relationship management (CRM), supply chain management (SCM) and in-house departmental operational systems. These applications have increased data fragmentation and complexity because they generate massive volumes of data in disparate software systems that were not designed to share data and interoperate with one another.
In addition to the more conventional enterprise applications, the recent onslaught of social networking and mobile computing in the workplace has increased corporate data even more. As Informatica CEO Sohaib Abbasi explains in the most recent conference call: "Relational database applications manage transactions. Social networking manages interactions. And the promise for social computing is for the enterprise to gain a competitive advantage by being proactive with current social data rather than being reactive with past relational data....The combined usage of by enterprises of social networking services such as Twitter, Facebook and blogging is doubling every year, resulting in the recent unprecedented explosion of data.".
How explosive? According to the incredibly persuasive Abbasi, Informatica's addressable market was $11 billion in 2005 and is expected to grow to $40 billion by 2013. I also saw some conflicting statistics by market researcher IDC that claims an 8.5% compounded annual growth rate for revenues in the market from 2009 to 2014. Not exactly an apples to apples comparison, but you get the drift.
No matter what industry data you wish to follow, the average analyst expectation for CAGR in the next 5 years for Informatica is 18.5% according to Yahoo Finance. With a current price of $47 and a P/E Ratio of 42, you get a PEG Ratio (price/earnings/growth) to the tune of 2.3. Not exactly nosebleed altitudes, but calls into question just how long the company can continue its impressive run, at least at the pace it has experienced the last six months.
In addition to valuation concerns, there is also the problem of competition. In a recent Standard & Poor's report evaluating Informatica, they specifically address the other players in the field, with the top 5 largest vendors captivating a 59.6% share of the market. Informatica ranks 7th, but only commands a 1.4% slice. It can be argued that this only gives them more room to grow, but it may also signal slim pickings going forward as companies like IBM, Microsoft, Oracle and SAP gain better traction with their more robust platforms. Informatica continues taking steps to broaden its offerings, but eventually, it may hit a ceiling.
If you are a momentum player, this may be a good place to park your money as Informatica has had the Midas Touch of late. I'm a believer that things return to the mean and if you apply this to their lofty P/E ratio of 42, you can probably bag this stock at a more reasonable valuation. Going back 5 years, Informatica's P/E ratio has typically been a more modest 26. Bear in mind that Informatica had a great 2010, so comparisons going forward will be more difficult. That, coupled with the fact that the market is currently under pressure, make me inclined to sit back and wait.
Monday, March 14, 2011
The Age of Deleveraging
A few months ago John Wiley & Sons released Gary Shilling's 500 page investing manifesto The Age of Deleveraging. If you aren't familiar with Shilling, he can probably be considered a heavyweight in financial circles with his impressive resumé: noted book author, Forbes Magazine columnist and respected money manager. His most recent claim to fame is being on the advisory panel of John Paulson & Company during its rise to prominence in the Hedge Fund industry when they bet against the housing market in 2006-2008. Shilling was in on the ground floor of one of the biggest financial bonanzas in history.
Unless you've been in a coma for the past 15 years, or, are new to investing, I'd skip the first 5 chapters and begin reading with chapter 6. Shilling doesn't mince words in this first section as he pontificates with evangelical zeal about the market bubbles since 1995 and the bursting of those bubbles. He goes into meticulous detail about the collapse of both the dot.com era and sub-prime crisis, to a fault in my opinion because it's all been said and done before. The mantra throughout this first part of the book is something like, "Gary Shilling made a lot of great calls in predicting the market's movements.". There was too much hubris in these chapters and quite frankly, was a bit of a turn-off. However, it didn't stop me from reading on because, if big egos were a problem, I'd have to stop watching sports, listening to music and going to the movies. Enough said.
The second part of the book is dedicated to Shilling's belief that the entire global economy is in store for a decade of slow growth and he gives ample proof to back up his argument. The author is of the school that that there is no such thing as decoupling and that the civilized world's economies are all hinged upon the success of what happens here in the United States. There are ramifications from the massive debts consumers and governments have racked up the past 30 years and here is where Shilling delivers the goods.
Shilling gives a list of nine causes of slow global growth in future years and then goes into painstaking detail about each of his points to insure there are no cross-currents in the data. Included in this list is the case for a deflationary era, unlike the majority of his contemporaries who cite inflation as the problem going forward. The author states that our path here in America looks very similar to the one Japan has embarked on for the last 20 years.
Shilling doesn't forecast a pyrotechnic environment for stocks in the coming decade: "...if I'm right that real GDP will grow about 2 percent per year for the next decade compared with 3.7 percent per year in 1982-2000, that secular bear market will continue to prowl. Stocks aren't likely to decline nonstop...But reflecting shorter, weaker economic expansions and longer, deeper recessions, bull markets are likely to be less robust than during the previous secular bull market, and bear markets will be frequent and more severe.". Later in the same chapter he goes on to say: "There is, of course, a slim, remote, inconsequential, highly improbable chance that I'm dead wrong in my forecast and, instead, the economy takes off like a scalded dog.".
The final section of The Age of Deleveraging encompasses 150 pages and Shilling gives you 12 investments to avoid, and, 12 investments to consider for the next decade. The author pulls no punches, and, like the section before (or the whole book for that matter), he goes the extra mile in backing up his thesis with plenty of statistics. It should be noted that he could have given you the abridged version of his lists and just shoehorned in some data, but he makes his points very believable with his presentations. I found it interesting that among the investments he says to avoid, he includes banks, commodities and emerging markets. On the buy side, he likes dividend paying securities, the U.S. dollar and healthcare.
He mentions throughout the book that he goes against the herd and if you've been following the market pundits of late, his investing ideas surely fit that bill. Shilling does not give any specific stock recommendations because he is not a stock picker. His approach is top-down which means he just invests in sectors or themes with ETFs or some mutual funds. He is also big on market timing and is not in the buy-and-hold camp.
I know how difficult it is to write a paragraph, let alone a 500 page book, and, I prefer to read every word an author writes to pick up the nuances in the text, but found myself skimming some parts of The Age of Deleveraging. The book was just so long and laden with statistics, it couldn't hold my interest in some instances. That's not to say it's not a good book. It is. You can get a lot out of this if you read it in small increments. If you are a bull, you may not agree with what Shilling has to say, but it might give you additional insight as to what may happen in the next decade. If you are a bear, it will give you plenty of ideas on how to make money in a contracting and volatile economy.
Unless you've been in a coma for the past 15 years, or, are new to investing, I'd skip the first 5 chapters and begin reading with chapter 6. Shilling doesn't mince words in this first section as he pontificates with evangelical zeal about the market bubbles since 1995 and the bursting of those bubbles. He goes into meticulous detail about the collapse of both the dot.com era and sub-prime crisis, to a fault in my opinion because it's all been said and done before. The mantra throughout this first part of the book is something like, "Gary Shilling made a lot of great calls in predicting the market's movements.". There was too much hubris in these chapters and quite frankly, was a bit of a turn-off. However, it didn't stop me from reading on because, if big egos were a problem, I'd have to stop watching sports, listening to music and going to the movies. Enough said.
The second part of the book is dedicated to Shilling's belief that the entire global economy is in store for a decade of slow growth and he gives ample proof to back up his argument. The author is of the school that that there is no such thing as decoupling and that the civilized world's economies are all hinged upon the success of what happens here in the United States. There are ramifications from the massive debts consumers and governments have racked up the past 30 years and here is where Shilling delivers the goods.
Shilling gives a list of nine causes of slow global growth in future years and then goes into painstaking detail about each of his points to insure there are no cross-currents in the data. Included in this list is the case for a deflationary era, unlike the majority of his contemporaries who cite inflation as the problem going forward. The author states that our path here in America looks very similar to the one Japan has embarked on for the last 20 years.
Shilling doesn't forecast a pyrotechnic environment for stocks in the coming decade: "...if I'm right that real GDP will grow about 2 percent per year for the next decade compared with 3.7 percent per year in 1982-2000, that secular bear market will continue to prowl. Stocks aren't likely to decline nonstop...But reflecting shorter, weaker economic expansions and longer, deeper recessions, bull markets are likely to be less robust than during the previous secular bull market, and bear markets will be frequent and more severe.". Later in the same chapter he goes on to say: "There is, of course, a slim, remote, inconsequential, highly improbable chance that I'm dead wrong in my forecast and, instead, the economy takes off like a scalded dog.".
The final section of The Age of Deleveraging encompasses 150 pages and Shilling gives you 12 investments to avoid, and, 12 investments to consider for the next decade. The author pulls no punches, and, like the section before (or the whole book for that matter), he goes the extra mile in backing up his thesis with plenty of statistics. It should be noted that he could have given you the abridged version of his lists and just shoehorned in some data, but he makes his points very believable with his presentations. I found it interesting that among the investments he says to avoid, he includes banks, commodities and emerging markets. On the buy side, he likes dividend paying securities, the U.S. dollar and healthcare.
He mentions throughout the book that he goes against the herd and if you've been following the market pundits of late, his investing ideas surely fit that bill. Shilling does not give any specific stock recommendations because he is not a stock picker. His approach is top-down which means he just invests in sectors or themes with ETFs or some mutual funds. He is also big on market timing and is not in the buy-and-hold camp.
I know how difficult it is to write a paragraph, let alone a 500 page book, and, I prefer to read every word an author writes to pick up the nuances in the text, but found myself skimming some parts of The Age of Deleveraging. The book was just so long and laden with statistics, it couldn't hold my interest in some instances. That's not to say it's not a good book. It is. You can get a lot out of this if you read it in small increments. If you are a bull, you may not agree with what Shilling has to say, but it might give you additional insight as to what may happen in the next decade. If you are a bear, it will give you plenty of ideas on how to make money in a contracting and volatile economy.
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