This May Be the Best-Positioned Stock in All of Tech

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But some growth stories are inevitably better than others. Hence this regular series. My goal? Out the Fakers, elevate the Breakers, and examine the growth stories stuck in between.

Next up: Teradata (NYSE: TDC  ) . Is this data analytics company growing sustainably enough for your portfolio? Let's get right to the numbers.

Foolish facts

Metric

Teradata Corp.

CAPS stars (5 max) ****
Total ratings 323
Percent bulls 95%
Percent bears 5%
Bullish pitches 33 out of 36
Highest rated peers Telvent GIT, CACI International, Ness Technologies

Data current as of March 7.

When companies want to measure anything, they use business intelligence tools. When they want to glean insights from what they've measured, they turn to analytics tools. Combined, these approaches can be remarkably effective for speaking business changes that result in better margins, better profits, and increasing cash flow.

As a market, BI and analytics have become increasingly valuable in recent years. How do we know? Big companies have told us. Consider IBM (NYSE: IBM  ) . Last September, Big Blue spent $1.7 billion to acquire Netezza, whose data warehousing appliances help consolidate and crunch data in a single location.

The year before, IBM acquired data mining specialist SPSS for $958 million. In 2007, Big Blue shelled out $5 billion for BI giant Cognos just one month after SAP (NYSE: SAP  ) brokered a $6.8 billion deal for Business Objects. See the pattern here? If measurement and analytics are so important as to warrant the titans of tech spending tens of billions to acquire it, then Teradata may be the best-positioned company in tech.

It's a position that's improving daily. Last month, the stock soared after Teradata easily bested Wall Street's projections for fourth-quarter revenue and profit. Demand for its analytics technology has led to accelerating sales growth.

But management wants more than organic gains. Last week, Teradata agreed to pay $263 million for the 89% of Aster Data Systems it didn't already own. Aster's unique clustering technology allows for analyzing structured and unstructured data together cost effectively yet on a massive scale. (Click here for more on how the system works.)

The elements of growth

Metric

2010

2009

2008

Normalized net income growth 22.1% (0.6%) 5.9%
Revenue growth 13.3% (3.0%) 3.5%
Gross margin 56.2% 54.9% 53.9%
Receivables growth 4.2% (12.6%) (8.8%)
Shares outstanding (million) 168.1 168.7 173.6

Source: Capital IQ, a division of Standard & Poor's.

Expect Teradata to make good on the Aster acquisition. There's plenty of evidence of efficient management in this table.

  • Growth investors like me love straight-line accelerating revenue growth leading to accelerating profit growth. Aside from a brief hiccup in 2009, growth has risen nicely. On a quarterly basis, the 10% revenue boost Teradata reported in the fourth quarter was sharply higher than the 1% gain the company managed in 2009's fourth quarter. That's a good sign.
  • Pricing power is also something we like to see. Or, in lieu of that, excellent cost management leading to higher margins. Here, gross margins are increasingly steadily. Mixing in Aster's ability to crunch a lot of data effectively using low-cost hardware should lead to further gains.
  • We also like businesses that collect quickly. Here, revenue has grown much faster than receivables, which suggests the business has trouble getting what it's due from customers. I'd like to see this translate into improving cash from operations, however. So far, that hasn't been the case.
  • Finally, dilution is under control. Management has used targeted buybacks to retire shares and return capital to shareholders. Thumbs-up.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 years)

EMC (NYSE: EMC  ) 13.4%
IBM 11.1%
Oracle (Nasdaq: ORCL  ) 13.8%
Teradata 8.7%

Source: Capital IQ. Data current as of March 7.

Interestingly, Teradata isn't the best growth story in this chart. EMC and Oracle do better thanks to a history of well-timed (and well-priced) acquisitions. EMC, in particular, looks attractively priced when compared to its assets and growth prospects.

Grade: Sustainable
But don't let EMC's pretty profile keep you from Teradata, too. As the Web grows in importance, big, deep-pocketed businesses are going to need to improve their ability to crunch data -- and to do so cost-effectively. This is Teradata's specialty. In tech, it's as close to a meal ticket as you'll find.

Do you agree? Disagree? Let us know what you think about Teradata's products, valuation, and the Aster Data deal using the comment box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

And in the meantime, keep tabs on Teradata by adding the stock to the My Watchlist tool, our free, personalized stock tracking service.

Teradata is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He owned shares of IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of EMC, IBM, and Oracle. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.


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