On the Level: A Software Stock Off Wall Street's Radar Screen
By Brett D. Fromson
Chief Markets Writer
3/5/01 5:57 PM ET
thestreet.com
The average large-cap semiconductor or telecom stock has not bottomed, in my view. Stocks such as Micron Technology (MU:NYSE - news - boards) are oversold but not undervalued.
But that doesn't mean there aren't bargains in tech. You just have to look hard for them. If you want to own tech -- and secretly you know you do -- then here is an alternate name for your consideration. It's a reasonably priced software company with a decent shot at double-digit growth that has completely slipped below Wall Street's sell-side radar screen. The name is Borland Software (BORL:Nasdaq - news - boards).
Those of you ancient enough to remember the 1980s might recall Borland as the maker of Turbo Pascal, a once-popular tool for PC-based developers to write applications software. I recall Borland because I wrote a bullish note on the company in March 1987, when at Fortune. The stock turned out to be a winner, running up from the single digits to a high of $82.25 in December 1991.
Since 1992, the stock has been a disaster. Years of weak management, misbegotten strategies and an unfortunate name change -- to Inprise -- led to several money-losing years that took the stock back to single digits. Time to look again.
And what do we see?
Borland Software Making a Move
New management adding value to this tech play
A niche software company -- once again called Borland -- that has been turned around by new management. The company still sells technology to technologists. Its development tools remain well regarded among software developers and work across a number of platforms -- Linux, Java and Windows. And at long last, Borland seems to have decent management, led by Dale Fuller, who joined as "interim" CEO in 1999. He came from Apple Computer, where he was general manager of the Powerbook unit that he helped restructure and return to profitability.
The income statement backs this up. In 1999, the company lost $30.7 million on $174.8 million in sales. Year 2000 was a distinct improvement, with the company earning $20.2 million on revenues of $191.1 million. And the forward momentum seems to be building, according to the latest quarterly results. After losing $3 million ($0.05 per share fully diluted) in the fourth quarter of 1999 on revenues of $45.5 million, Borland earned $7.3 million ($0.11 per share) in the fourth quarter of last year on sales of $50.3 million. If you project the 11 cents a share for the next four quarters and assume Borland can earn 44 cents a share for the year, then the stock, which closed today down 3.4% to $8.06, is priced at about 18 times forward earnings. And that P/E is probably overstated because CEO Fuller has said this year that he expects Borland to achieve 20% revenue growth.
Fuller plans to roll out a host of new software-development products this year and next to back up his 20% revenue forecast. The new products build on the markets in which Borland already has an entrenched set of users and customers. The company is currently shipping Linux application-development software. It has a Java development tool that is one of the fastest-growing tools in that market. It is increasing its direct sales force from 200 to 250. Basically, Borland is pushing on all fronts.
If you believe Fuller has a reasonable chance of making his 20% revenue projections, then Borland is quite fairly valued at $8 a share. First, the company has $260 million of cash, or $4 a share. Subtract that from Borland's $560 million market cap and you are basically buying the business for $300 million. Revenues this year are likely to exceed $200 million, assuming the company simply maintains last quarter's $50 million run rate. So, on a price-to-sales ratio, you can get the stock for 1.5 times. That is far, far less than other, better-known computer software companies trade for. Unless you believe that Borland has a uniquely inferior business with lower profit margins than other software companies, its price-to-sales ratio seems unduly low.
Certainly, Fuller seems to think so. He takes pretty much all of his compensation in stock. In 1999, for example, he received 1 million stock options and a salary of $1. (Oh, and the company also paid his insurance premiums to the tune of $849.) He has every incentive to reward shareholders.
So far, he has. The stock has rallied from $4 a share when he joined in 1999 to a recent peak of about $10 a share. A few small-cap value and growth investors have been in Borland for a while. Lately, the big money has come knocking. Merrill Lynch Asset Management bought more than 6 million shares, according to filings made with the Securities and Exchange Commission this month and last. (That's about 12% of the company and may explain the stock's recent ramp.)
Interestingly, you won't find a Merrill Lynch sell-side report on Borland. Not a single major brokerage follows the stock. (The only report I have seen comes from Freimark Blair, a New Jersey-based institutional research boutique that makes a market in Borland.) That's in itself a good contrary indicator. The Wall Street tout machine has yet to bull this stock to silly levels. There is not an analyst on Wall Street that has a good, bad or indifferent word to say about Borland. Sounds like a tech stock worth checking out. |
