Is Teradata Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Teradata (NYSE: TDC  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Teradata's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Teradata's key statistics:

TDC Total Return Price Chart

TDC Total Return Price data by YCharts.

Criteria

3-Year* Change

Grade

Revenue growth >30%

45.3%

Pass

Improving profit margin

(8.5%)

Fail

Free cash flow growth >Net income growth

59.3% vs. 33%

Pass

Improving EPS

35.1%

Pass

Stock growth (+ 15%) <EPS growth

109.2% vs. 35.1%

Fail

Source: YCharts. *Period begins at end of Q2 2010.

TDC Return on Equity Chart

TDC Return on Equity data by YCharts.

Criteria

3-Year* Change

Grade

Improving return on equity

(30.8%)

Fail

Declining debt to equity

Debt raised in 2011

Fail

Source: YCharts. *Period begins at end of Q2 2010.

How we got here and where we're going
Teradata doesn't quite win us over today, as it's earned only three out of seven passing grades. Despite promising revenue growth, profit margins have fallen over the past three years, and earnings have failed to keep pace with the company's share price gains. Will Teradata be able to turn this weakness around and rebound? Let's dig a little deeper to find out.

Teradata turned around flagging revenue in its latest quarter, with a 7% improvement coming as welcome relief after the company experienced an 8% year-over-year decline in the previous quarter. Software and hardware sales fell by 6%, but both consulting and maintenance services revenue increased (by 7% and 6%, respectively). Fool contributor Sean Williams points out that Teradata has ample cash to invest in its products, and the company can rise on the back of a growing interest in cloud computing and Big Data. According to International Data Corporation, the enterprise Big Data solutions market is expected to increase from $6 billion in 2011, to $23.8 billion in 2016. That's a lot of potential upside for Teradata.

Rivals such as EMC and NetApp (NASDAQ: NTAP  ) are aggressively expanding into Teradata's territory with competing offerings, and challenging its market position with their outsized financial power. NetApp has been tapping into the rapidly growing cloud-computing and big data arenas, whereas EMC plans to establish a specialized cloud and data analytics services company called Pivotal.

On the other hand, Teradata seems highly dependent on its high-end data warehousing business. For instance, 51% of Teradata's 2012 revenue was generated from either consulting or maintenance services. Fool contributor Daniel Sparks notes that a high level of complexity, deep integration, and substantial costs create a rather sticky situation that prevents Teradata's its clients from switching to another data warehouser.

Putting the pieces together
Today, Teradata has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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