Scotia Capital calls Open Text "stellar" for shareholders

I’ve known many a research analyst, and some are more “glass half full” guys than others.

The darling fellow at Scotia Capital who covers Software & Services stocks isn’t one of those people. The glass is never half full for him, it is always half empty at best. Until someone knocks the glass over and all is lost. This is an important quality for an Equity Research Analyst to have, and it’s — in part — what makes him such a respected analyst.

So, when he says something quite bullish on a tech name, you can’t be sit up and pay attention.

Here’s the take on Open Text (OTC:TSX), entitled “Five Pillars of Support”:

We believe that Open Text Corporation’s stock is an attractive investment opportunity for five key reasons:

1. Returns to shareholders are stellar – forecasting return on invested capital (ROIC) > 20%, well above weighted average cost of capital (WACC) of 10.9%;

2. Enterprise Content Management (ECM) market is set to deliver continued growth on productivity and compliance;

3. Consolidation role offers upside to estimates;

4. The firm as a potential acquisition target offers blue-sky to the stock price (possible value of $66 to $78 per share based on 10x to 12x EV/EBITDA our F2011 estimates); and

5. Valuation discount to peers misrepresents the potential upside we anticipate for the firm, based on a combination of organic and acquired growth and the associated operating leverage.

We have raised our one-year target price for Open Text Corporation to US$63 per share from US$50. Our financial estimates have been revised upwards to reflect increased license revenue growth associated with an improving environment for enterprise software sales, coupled with higher earnings supported by increasing operating margins. Our NTM one-year forward EV/EBITDA multiple increases to 9.5x (up from 8.5x), reflecting our growth forecast and a return to historical valuations.

MRM