Steven,
You make some good points, especially noting that Software Artistry is currently a second-tier company when comparing their sales that is roughly two-thirds to one-half of Clarify, Vantive, and Scopus. However, when looking at the front office software biz as a whole, I think SWRT is certainly one of the leading companies. I just can't rule out a $37 million dollar (sales) company at this stage of growth in the industry.
As I mentioned in an earlier post, I'm really weak on understanding the advantages and disadvantages of the various companies' technology. I'd really appreciate some more detail from you about that.
I've never seen a table posted in one of these folders, but I'll give it a try to compare some important data (in my mind) about the companies you mentioned. I'll quantify analyst perception by using Zack's rating of 1.0 (strong buy) to 5.0 (strong sell.) Visibility will be rated by the number of analysts reporting to Zack's. For stock valuations, I'll include the PSR and the PE/Growth ratio. That last item is calculated by dividing the PE by analysts' estimated growth from FY96 to FY98. To offer just one perspective on valuations, the table includes the profit margin and whether ir is increasing (inc) or decreasing (dec).
SWRT CLFY VNTV SCOP
Sales $37 million $67 million $76 million $63 million
Visibility 3 analysts 6 nalysts 9 analysts 6 analysts
Perception 2.3 2.8 1.8 1.7
Margins 6.5% inc 14.1% dec 15.9% dec 13.3% dec
PSR 3.0 3.4 9.1 9.0
PE/Growth 60% 101% 150% 122%
Bear in mind that I'm not suggesting that such a few simple statistics give us everything we need to know about a company. However, I think they do shed some light on the criteria you mentioned. You may not agree with me, but the following is what I get from that information.
Sales and Margins: SWRT's sales and margins are a LOT lower than the others. I would expect margins to increase as sales do. That's one reason I'm excited about the company. Notice that of the four companies, only SWRT's margins are increasing, though I don't want to overstate the importance of that.
Analyst Perception: Analysts view SWRT better than Clarify though VNTV and SCOP are the clear winners in that category.
Visibility: I like the fact that there are so few analysts covering SWRT. I like to get in on a small cap stock early before everyone notices the company. That offers greater profit potential in my mind so long as the fundamentals of the company are strong (as I believe they are for SWRT.)
Valuations: Each of us has to decide for ourselves ift VNTV and SCOP merit a PSR that is 3 times that of SWRT. Certainly the much greater margins would support that argument for many people. Based on PSR and margins alone, a reasonable argument would be that Clarify is very undervaled. It has the margins of Scopus and Vantive yet the PSR of SWRT.
If you believe strongly as I do that a fairly valued company has a PE that is roughly equivalent to its growth rate, I think the inherant risks you mention about SWRT are more than compensated for. The PE is only 60% of the estimated earnings growth. Contrast that with the other three companies whose PE is equal to or greater than estimated growth.
Perhaps more important is that over the next two years analysts estimate SWRT's average annual earnings growth rate to be nearly four times that of Clarify's, twice that of Vantive's, and a little bit more than Scopus.
I don't think there is any particularly clear picture that is rendered from the data, but I do believe the stats make a case that despite how much anyone might disagree with me, I haven't confused "cheap" with "appropriately valued" as you suggest.
Thoughts anyone? |
