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: Actuate
|CAPS stars (out of 5)||*****|
|Bullish pitches||74 out of 76|
|Highest rated peers||Fundtech, Tyler Technologies, Click Software|
Data current as of Feb. 20.
Actuate is the highest rated application software stock in CAPS. Impressed? You should be. This is an industry that includes Adobe and salesforce.com, among others.
I get the draw. Not only is Actuate a key player in the highly important business intelligence market, it's also cheap compared to Wall Street's expectations for earnings growth. Specifically, the stock trades for less than 10 times next year's average profit estimate and about half of what analysts expect the company to earn over the next five years, resulting in a 0.58 PEG ratio.
Lower is better when it comes to the PEG, and 0.58 is pretty low. The risk is that it's a relative measure. Buy when analysts are being too generous with their estimates and you'll pay in losses when the mirage fades. And that may be a problem here, too.
Why? According to Earnings.com data, Actuate has an inconsistent history when it comes to meeting and beating analyst expectations. In Q3, the company beat the consensus by $0.06 only to fall a penny short the next quarter.
As a growth investor, I prefer situations where analysts are routinely wrong on the low side. Take Baidu
The elements of growth
|Normalized net income growth||(9.8%)||19.4%||(32.4%)|
|Shares outstanding (million)||45.3||45.5||44.2|
Source: Capital IQ, a division of Standard & Poor's.
A closer look at the financials doesn't do much to alleviate my fears, either. There's no pattern to draw from:
- Growth investors like me love straight-line accelerating revenue growth leading to accelerating profit growth. We have neither here. Revenue was up last year but at the expense of normalized profits. Cash from operations improved from the year prior to about equal with the company's ... 2007 performance.
- Pricing power is also something we like to see, or in lieu of that, excellent cost management leading to higher margins. Here again, there isn't much good news to report. Gross margin is up from 2008 but down from last year. Lower prices may have fueled revenue growth.
- We also like businesses that collect quickly. Fortunately, there's good news here. Receivables fell as revenue grew, no doubt contributing to the recovery in cash from operations.
- Finally, dilution has remained mostly in check thanks to Acuate's ability to self-fund through cash flows. The company produced more than $21 million in free cash flow last year, according to Capital IQ data.
Competitor and peer checkup
Normalized Net Income Growth (3 years)
Source: Capital IQ. Data current as of Feb. 20.
IBM and SAP are the growth stories here, and for good reason. Not only are they the owners of two of the world's best-known BI suites -- i.e., Cognos and BusinessObjects -- but they're also well-diversified in terms of products and geographic sales. Actuate and MicroStrategy don't have that advantage.
And yet history may not mean much when it comes to evaluating Actuate's prospects. The company scored highly in a recent survey of companies looking to adopt BI on mobile devices. That's important. Noted BI market researcher Howard Dresner estimates that, by 2013, at least 25% of all users will consume BI data exclusively on a mobile device. Actuate should benefit from the shift.
So will others. Qlik Technologies
Do you agree? Disagree? Let us know what you think about Actuate products, valuation, and competitive positioning using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email or replying to me on Twitter.