OTEX Stock: Good As It Gets For Value Investors

- June 29, 2016

OTEX stock

Open Text Corporation (NASDAQ:OTEX) is not a household name. But in a market that fails to appreciate value, or prioritize free cash flow creation and debt reduction, OTEX stock should be the cream of the crop for value investors.

What is Open Text?

Open Text is a software and cloud company in the enterprise information market (EIM). It is involved in just about every cloud, software, and analytic business. OTEX helps to improve the day-to-day operations for enterprise customers in all major sectors of the market.

OTEX helps its customers save money and streamline operations. Like Jim Cramer said, any business that helps other companies save money is a business to be invested in. This most certainly applies to Open Text.

However, Open Text is not a flashy company. Most of its organic businesses are mature. Therefore, it finds growth by acquiring small companies that operate in its space. Those acquisitions then bring something new to its arsenal of products and services.

Open Text then optimizes and grows those acquired assets. The end result is a company with operating margins over 21%, which is unprecedented among cloud-based companies, and a company that is expected to grow at a very moderate pace of 3% on an annualized basis for 2016 and 2017.

Creating OTEX stock value through M&A

I initiated coverage on OTEX stock back in July of last year. OTEX had a top five rating. Since then shares have soared 46%. Yet despite these gains, OTEX stock trades at less than 15x forward earnings.

Open Text’s attractive earnings multiple can be attributed to the company’s ability to increase earnings and margins at a near equal clip to stock gains. While much of the company’s strategy centers around M&A in a very fragmented space, many value investors don’t realize the scale of Open Text’s acquisition plans.

Last year OTEX management said it wanted to spend $3 billion on acquisitions over the next few years. At the time it had $700 million in cash. It has since generated over $470 million in free cash flow over the last four quarters. And it just recently sold $500 million in senior notes to create even more cash.

Therefore, it won’t be difficult for Open Text to spend $3 billion over a few years time, not when it is accumulating cash like this. After spending the last year growing its earnings and improving its debt-to-asset ratio, OTEX has become very active in M&A, as promised.

In the last two months OTEX has spent $750 million in four separate acquisitions. It bought ANXeBusiness to strengthen its auto and healthcare cloud business, Recommind to bolster software-as-a-service and information analytics, and then it bought a number of HP assets in two separate purchases.

Collectively, these purchases could create up to $350 million in new annual revenue. OTEX will then optimize to drive profits higher and cross-sell with its existing business. Importantly, these recent acquisitions have most likely not been figured into the company’s outlook. Therefore, revenue growth and Open Text’s EPS might very well be much higher than analysts currently anticipate.

OTEX stock is an obvious buy

Given what this company can do with M&A combined with its already cheap valuation, and a respectable dividend yield of 1.5%, it is clear that OTEX stock is a must buy. Not to mention, OTEX still has about $2 billion left to spend on future acquisitions, money it is sure to spend now that management is in the midst of a buying spree.

All things considered, there is a great deal of value to still be unlocked in OTEX stock.



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