Do you still doubt that Wall Street hasn't a clue what it's doing? Look at the results that software company Sybase (NYSE:SY) posted Thursday morning, and the Street's reaction. I don't care what metric you use -- pro forma profits (which were up 10% year on year) or GAAP net profits (up 57%) -- either way, Sybase turned in a fine third quarter of 2005. Yet the Street is selling the stock off by nearly 3% as of this writing. What's the (Radio) Frequency (Identifier), Kenneth?
Speaking of RFID, among the quarter's many accomplishments that Sybase listed in the press release was the launch of its second-generation software platform, called "RFID Anywhere 2.0." While RFID use remains in its infancy, the adoption of RFID-based logistics by such corporate heavyweights as Wal-Mart (NYSE:WMT) and Home Depot (NYSE:HD) promises to reward Sybase as one of the first movers in this space.
Not that the company necessarily needs improvement. The numbers in Thursday's earnings release tell the story of a business that's doing just fine as is. For the year to date, Sybase has generated a whopping $120 million in free cash flow. That translates to a 36% improvement over the $88 million that Sybase generated in the first nine months of 2004, and it puts the company on track toward generating $160 million in free cash flow by the end of this year.
Granted, that's not as good as things were looking three months ago. With $90 million in free cash flow collected by mid-year, the company looked to be trending much higher -- toward $180 million for the year -- back in July. But even if free cash flow doesn't pick up in Q4, $160 million by year's end would give Sybase a price-to-free cash flow ratio of 13 and an enterprise value-to-free cash flow ratio of 10. With the company currently expected to achieve 9% per annum earnings growth over the next five years, Sybase's valuation is beginning to look awfully tempting.
With one caveat: the company's Financial Fusion (FF) subsidiary. This unit remains worrisome for two reasons. First, at last report, FF was dragging down Sybase's companywide results by consuming cash and failing to compete effectively against peer banking software makers such as Online Resources (NASDAQ:ORCC), Digital Insight (NASDAQ:DGIN), and Corillian (NASDAQ:CORI). Second, for two quarters running, Sybase has buried FF's operational results in its press releases, revealing only the business's revenues, but not whether those revenues are profitable.
If Sybase reverses itself on its FF disclosure policy or, even better, sells off the (presumably) underperforming unit, I'd have to seriously consider buying into this one. But not until then.
Home Depot is a recommendation of Motley Fool Inside Value .
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Fool contributor Rich Smith owns shares of Corillian of no other company named above. The Motley Fool has a disclosure policy.
