Did I jinx it?
After previewing the earnings report for Progress Software
I hope not, because as the market seems to have realized over the past couple of days, post-earnings-release-day panic, the company actually did turn in quite a strong quarter. It was news extraneous to the company's Q4 results that sent the stock down lower, and that reaction may well have been an overreaction.
In reporting on fiscal Q4 and full year 2006, the company announced that overall revenues grew 12% in comparison with the prior year's quarter, with high-margin software licensing revenue growing even faster, at 20%. Earnings per diluted share grew in between these rates, up 18% over the year-ago quarter to $0.33 per share. For those keeping score, that's a penny over the top of the company's own most optimistic scenario as outlined three months ago.
For the analysts, who prefer to measure these things under "pro forma" (Latin for "woulda-shoulda") accounting, the firm racked up $0.38 per share worth of that flavor of earnings, for a 23% increase over last year -- once again, a penny more than estimates (The analysts' estimates this time).
Yet despite all this good news, the stock fell. Why?
Well, first off, Wall Street's reaction to earnings reports often hinges less on the "report," per se, and more on the projection of what news future reports might hold. In Progress' case, that projection seems to have disappointed the Street crowd. The company set its revenue target for fiscal Q1 2007 at $103 million to $105 million, its earnings-per-share target at $0.15 to $0.17, and its pro forma EPS target at $0.29 to $0.31. (To get from pro forma to generally accepted accounting principles, you need to subtract out $0.14 worth of amortizing goodwill and related expenses from acquisitions, as well as expenses for stock options issued.)
The second reason for the stock's fall was another constant on Wall Street: When company A decides to buy company B, the Street generally bumps up the price of company B and discounts company A. So Progress' announcement that it will buyNeon
So after the sell-off, does Progress still look like a buy? Well, free cash flow came in at $70.6 million for the year, behind the run rate I had computed for the company. The stock remains down 7%. And cash levels will fall to $197 million if the Neon deal goes through. Add it all up, and unless adding Neon does something seriously bad to Progress' cash flow (or return on equity), the company now trades at an enterprise value-to-free cash flow ratio of 13.5 -- still below its return on equity. So jinx or no, I have to say it: Progress is still a "buy."
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Fool contributor Rich Smith does not own shares of either company named above.