BMC + BSM = Upside

So far this year, shares of BMC Software (NYSE: BMC  ) have been treading water. There are some concerns that IT spending is slowing in North America and the competition is getting tougher as companies like IBM (NYSE: IBM  ) and Oracle (Nasdaq: ORCL  ) bulk up on acquisitions. Despite all this, BMC does have a clear roadmap to grow the business over the next couple of years.

On Tuesday, the company reported its fiscal Q4 results. Revenues increased 2.8% to $419.4 million and net income rose 22% to $62.8 million, or $0.30 per share. Management has made lots of progress in streamlining its operations, and it looks like there will be further improvements on this front.

BMC has a large mainframe software business. While it's mature, it provides significant cash flows to fund new, higher growth businesses. Over the past few years, the main focus has been on BSM (business service management) software. This helps companies track information technology (IT) assets, minimize downtime, and enhance overall security. As a testament to the power of the technology, BMC snagged Accenture (NYSE: ACN  ) as a new customer in fiscal Q4.

To further improve its BSM offering, BCM purchased ProactiveNet on Tuesday. This privately held company develops sophisticated technology that allows for an "early warning system" for IT problems. It's something that saves companies lots of manual labor and should be a nice fit for BMC. ProactiveNet also has a nice list of customers that includes biggies like ADP (NYSE: ADP  ) , Bank of America (NYSE: BAC  ) , and AIG (NYSE: AIG  ) .

Trading at 3.1 times revenues, BMC has a reasonable valuation compared to other major enterprise software players. The company also expects to generate cash from operations of $475 million to $525 million for the full year. With $1.5 billion already in the bank, the firm has lots of firepower for stock buybacks, as well as acquisitions to build on its BSM franchise. This could mean that the stock may not tread water for long.

Further Foolishness:

Fool contributor Tom Taulli, author of The Complete M&A Handbook, does not own shares mentioned in this article. He is currently ranked 2.817 out of 29,306 in Motley Fool CAPS.

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