Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



How This Stock Beat the Bears

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Since Motley Fool Stock Advisor opened its pages in 2002, David and Tom Gardner's stock picks have returned an average of 80% each. That compares to 25% for equal positions of the S&P 500.

We're celebrating the newsletter's 10-year anniversary by releasing -- for free -- the recommendation articles for several of the newsletter's biggest winners. Today we look at Teradata (NYSE: TDC  ) , recommended in both 2009 and 2011 by Tom Gardner. The two positions have returned 368% and 37%, respectively.

Below you'll find the original recommendation as it appeared in the April 2009 issue of Stock Advisor -- near the bottom of the devastating bear market.

Tom's Top Pick: Teradata
I get hundreds of emails each day. I send my share, too. I'm a big fan of Facebook, Tivo, and Netflix. I like trolling through CAPS and its 3 million stock picks. My Amazon Kindle is packed with more than 50 books. I may name my first child "ESPN."

Imagine what this means for a data miner who can capture and analyze the bread crumbs I leave behind as I hop from website to website, application to application. Now overlay my offline spending habits -- credit card purchases, store visits, NFL-watching, whatever -- and you have an accurate picture of who I am, what I do, and most important, what I'm likely to pay for.

We live in an informational age, and companies that can profit from gathering and understanding that information are going to thrive. That's why this month I'm recommending Teradata, a specialist in data warehousing and analytics that helps global companies make heads and tails of the volumes of data they capture.

Drowning in Data
Data warehousing, business intelligence, and data mining (industry speak for organizing and making sense of gobs of data) is not easy for the smallest of firms, let alone large, global conglomerates like Wal-Mart, 3M (NYSE: MMM  ) , or Stock Advisor recommendation eBay (Nasdaq: EBAY  ) . These and other influential companies seek out Teradata, which pioneered data warehousing 30 years ago through research conducted at CalTech and today is the largest sole provider of these multimillion-dollar solutions.

Teradata specializes in enterprise data warehousing solutions targeting the world's 3,000 largest companies. Its award-winning technology gathers, aggregates, organizes, and processes data, then offers intelligence that clients use to make smarter and quicker decisions. Time is money, and these large customers are willing to pay for better insights -- and easier access -- to the data behind their companies. Of course, Teradata also charges the requisite service fees to go along with its products.

Just like its customer base, Teradata is multinational, operating 90 facilities in 40 countries. North and South America make up 56% of its revenue, with Europe, the Middle East, and Africa coming in a collective second at 26%, followed by Asia at 18%. (That said, Japan is Teradata's second-largest market after the U.S.)

Yep, It's Debt-Free
With "debt" considered a naughty four-letter word these days, Andy and I are happy to say we don't have to worry about it with Teradata, which has a fortress-like balance sheet of $442 million in short-term T-bills and zero debt (just some operating leases).

Operating margins are comfortably in the high teens, and while not as high as chief competitor Oracle's (Nasdaq: ORCL  ) , they're in line with IBM's (NYSE: IBM  ) and much higher than those of a smaller pure play, Netezza. Cash flows are robust, and capital expenditures, including capitalized software costs, are reasonable.

Typically, I prefer the Netflix or Costco business models: Sell lots of things to millions of people rather than sell big-ticket items to a few large clients. But Teradata's focus has one key advantage: stickiness. Between 80% and 90% of the company's revenue comes from its existing clients through service contracts and product upgrades. After all, it's not like a multinational, multibusiness company wants to switch its data warehousing solution every year (or even every few years, for that matter).

What's It Worth?
The downside to this laser focus is that revenue growth is tepid. Management is targeting 5% to 7% annual "top-line" growth, in line with what it's managed to do the past few years. The strong U.S. dollar will nick operating margins this year, and customers may hold off on upgrades in a weak economy.

But looking out five years, Andy and I think margins will pick up and growth will kick in as clients return to investing in their data warehousing -- they can't afford to fall behind. Teradata's warehousing prowess, even in the face of stiff competition, and its deep client relationships will keep free cash flows healthy -- and management will deploy that cash back into the business at 25%-plus returns on capital. Off robust cash earnings of $225 million, we see a stock worth at least $25 in five years, giving us annualized returns of more than 10%.

When We Might Sell
The difficulty with investing in high-tech companies is that they constantly have to innovate just to tread water against fierce competition. Teradata is no exception. Oracle spends the equivalent of Teradata's market cap in R&D each year. IBM spends three times that. Tech gurus Forrester and Gartner call Teradata's technology tops in the field, and a rich history will help keep the wolves at bay -- but we'll keep our eyes and ears open.

Also, Teradata can't sell to its existing clients forever, so it has to continue landing new customers. That's one reason it's starting to target smaller companies. I think this can help jump-start organic growth over the next couple of years, but because the margins are lower, I'll be watching the delicate balance.

Finally, because a chunk of Teradata's existing clients are tied to the financial sector, there's inherent high risk here -- definitely something to watch.

The Foolish Bottom Line
I'm not a top-down investor trying to find the next hot trend, but I do pay attention to long-term, secular consumer shifts. How we gather, manage, and analyze data will continue to be mission-critical for companies all over the globe. I see it every day as CEO of The Motley Fool, where we strive to make timely decisions based on what? Data! And we're just a speck on the huge mountain of data warehousing. Teradata is an innovator -- it's only in year two as a public company -- and Andy and I are confident it will continue scaling new heights. Start your own climb today by picking up a few shares.

--Tom Gardner, April, 2009

Investing lessons
Tom and Andy recommended Teradata in the darkest of times, near what turned out to be the trough of the scariest market in decades. Yet, they were confident that  the right companies would provide outstanding long-term returns.

TDC Chart

TDC data by YCharts

Thus, with the long-term in mind, they picked a young and innovative business in an important and growing sector, with a rock-solid balance sheet. They knew companies would eventually have to invest in data services, or risk falling behind competitors. Teradata's competitive advantages and reasonable valuation sealed the deal.

Fool analyst Rex Moore tweets but is not a twerp. Of the companies mentioned here, he owns shares of eBay. The Motley Fool owns shares of Costco Wholesale, International Business Machines, Netflix, and Oracle. Motley Fool newsletter services have recommended buying shares of Teradata, Netflix, eBay, Costco Wholesale, and 3M. Motley Fool newsletter services have recommended creating a synthetic long position in International Business Machines. Motley Fool newsletter services have recommended creating a diagonal call position in 3M. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2003835, ~/Articles/ArticleHandler.aspx, 5/24/2016 10:48:01 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Rex Moore

Rex Moore spent his formative years in Texas, and fought beside Davy Crockett at the Alamo. He currently travels the globe for TMF, bringing back video reports on conferences and companies that matter for investors.

Today's Market

updated Moments ago Sponsored by:
DOW 17,696.60 203.67 1.16%
S&P 500 2,072.94 24.90 1.22%
NASD 4,836.13 70.35 1.48%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/24/2016 10:31 AM
EBAY $24.06 Up +0.60 +2.56%
eBay CAPS Rating: ****
IBM $147.83 Up +1.06 +0.72%
International Busi… CAPS Rating: ****
MMM $167.89 Up +1.78 +1.07%
3M CAPS Rating: ****
ORCL $39.98 Up +0.80 +2.04%
Oracle CAPS Rating: ****
TDC $26.56 Down -0.07 -0.24%
Teradata CAPS Rating: ****