Correct me if I'm wrong. Recessions are supposed to be bad for business, right?
So said Blackboard
Profits told a different story, of course. Blackboard earned only $0.09 last year, down 36% from 2007. But that's because Blackboard is a software company. So just like Microsoft
In Blackboard's case, the big hit comes from GAAP accounting rules that require it to amortize the cost of its serial acquisitions from years past. And as we've seen following big acquisitions at Symantec
But shift your gaze to the cash flow statement, and you'll see that far from earning nearly nothing, Blackboard generated $55.8 million in cash profits last year. Blackboard's hogtied GAAP numbers may have the stock trading at a triple-digit price-to-earnings ratio, but the stock sells for only 16 times its trailing free cash flow. Considering that analysts expect Blackboard to keep growing its profits at 25% per year over the long term, that tells me the stock is attractively priced today -- but how long will it take for investors to realize just how cheap Blackboard really is?
Not long now
According to management's guidance, amortization of old acquisition costs this year will be about 25% less than last year. That's going to do wonders for Blackboard's GAAP numbers, by removing the pressure on net profits. With lower costs, GAAP profits could rise as much as eightfold next year, to perhaps $0.72 per share.
Assuming that this comes to pass, Blackboard is trading at about 40 times forward profits today -- a valuation that still looks pricey from a traditional PEG point of view. But with free cash flow still on the rise (Blackboard is guiding to a midpoint of $65 million), the stock actually looks cheap to me. My advice: Bide your time, wait for investors to misinterpret the numbers, and pick up the stock on any pullbacks from Thursday's bull run.
Does the Motley Fool Hidden Gems team agree? They're the ones who recommended the stock in the first place, after all. Find out whether they still consider this one the teacher's pet when you take a free trial.
Fool contributor Rich Smith owns no shares of any company named above. Blackboard and Natus Medical are Motley Fool Hidden Gems selections. Symantec and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. The Motley Fool has a disclosure policy.