THE MOTLEY FOOL
The Daily Double (Archive) - A review of a company whose stock
price has doubled within the last year.
May 11, 1998
Manugistics Group, Inc.
(Nasdaq:MANU - news)
Phone: 301-984-5000
Website: ht tp://www.manugistics.com
Price (5/8/98): $58 25/32
HOW DID IT DOUBLE?
As one of the two top developers of supply chain management software, Manugistics has become a
thirteen-bagger over the last three years the old-fashioned way -- by providing an indispensable
product, one that makes businesses more competitive and profitable. Indeed, when historians
account for America's nearly perfect economy in these latter days of the 20th century, Manugistics
may be apportioned a surprisingly large role.
The numbers help us get a handle on this company's success. Overall, revenues have nearly tripled
in the last two years to $176 million. In the last four quarters, year-over-year revenue from software
licenses has sprinted ahead by 127%, 103%, 84%, and 108%. Even after adding in 1.6 million
shares issued last August in a follow-on offering and another 1.6 million issued in the recent
acquisition of complementary software tools provider ProMIRA, the company saw earnings per
share soar 69% for the latest fiscal year, with EPS up 67% in the fourth quarter.
Those fourth quarter numbers were so eye-popping that the stock nearly doubled in the week
following their release.
BUSINESS DESCRIPTION
Based in Rockville, Maryland, Manugistics Group develops, markets, and supports supply chain
management software that synchronizes the complex interactions that keep products flowing
smoothly and most profitably through a company's entire supply chain. The software helps a
company forecast product demand and coordinate the timing of distribution, manufacturing,
procurement, and transportation activities to meet this demand.
Although Manugistics' software complements Enterprise Resource Planning (ERP) software
provided by the likes of SAP and Baan (Nasdaq:BAANF - news) , it offers something more: a
real-time means of coordinating activities between a company and its suppliers and customers. The
benefits are basic -- improving customer service by supplying enough of the right product at the right
time while reducing inventories and thus boosting profitability by making better use of capital and
manufacturing resources.
Studies show that supply chain management software offers a remarkable return on investment,
quickly paying for itself. Companies can recover as much as 7% of their overall revenues by
managing their supply chains more effectively.
Manugistics has partnered with ERP system vendors such as Oracle, Marcam, and Baan, as well as
with the leading consulting firms, including Andersen Consulting and Booz Allen. In partnership with
ERP gorilla SAP, the firm also offers software that integrates supply management functions with
SAP's R/3 ERP application.
The company has focused particularly on consumer products companies and customers engaged in
discrete manufacturing. Over 600 companies use Manugistics' software, including consumer
packaged goods giants Gillette, General Electric, and Procter & Gamble; chemical companies such
as Dow and DuPont; and other industry leaders such as Lucent, PepsiCo, Bristol-Meyers, and
Dayton Hudson.
International sales accounted for 38% of revenue in the fourth quarter versus 23% for all of FY97.
Software licenses made up 60% of revenues in FY98 versus 54% in FY97.
i2 Technologies (Nasdaq:ITWO - news) is Manugistics' top competitor. Insiders own about a
third of the shares, with CEO/Chair William Gibson holding over 21% of the stock.
FINANCIAL FACTS
Income Statement*
12-month sales: $175.7 million
12-month income: $15.4 million
12-month EPS: $0.59
Profit Margin: 8.8%
Market Cap: $1587.1 million
(*Pro forma, excluding acquisition charges)
Balance Sheet
Cash & Securities: $81.9 million
Current Assets: $145 million
Current Liabilities: $50 million
Long-term Debt: $0.4 million
Ratios
Price-to-earnings: 99.6
Price-to-sales: 9.0
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Any screen of top stock performers or companies showing strong revenue and earnings gains over
the past couple of years would have turned up Manugistics. Plus, the complementary back-office
applications market worked by ERP leaders such as SAP and PeopleSoft (Nasdaq:PSFT - news)
has also seen explosive growth.
Indeed, any investigation into why some manufacturers were becoming significantly more efficient
and profitable or what could be done to help the laggards would have led you to the ongoing
back-office revolution, and thus to Manugistics.
With trailing twelve-month earnings of $0.49 a share and a stock price that dipped to the mid $30s
prior to the recent earnings report, Manugistics traded at roughly 70 times trailing earnings. That
appeared pricey, to be sure, but it was actually a discount to the third quarter's 84% growth in
software revenue and 88% EPS increase. For a company experiencing hypergrowth, the stock was
a bargain.
WHERE TO FROM HERE?
First Call earnings estimates show a 10-analyst consensus of $0.88 a share for FY99 ending next
February and $1.28 a share for the following year. Those numbers suggest a growth rate just slightly
below the projected 50% long-term projection, which gives us a PEG ratio of about 2 and YPEG
valuation of nearly $45. By both measures, Manugistics looks expensive.
The company also has a strong competitor in i2 Technologies, which recorded March quarter
revenue of $66 million and claims customers such as Dell Computer and Texas Instruments. Plus,
Baan and PeopleSoft are both planning to offer their own supply chain management software.
Nonetheless, Manugistics' critical software licensing revenues are still growing in triple digits. And
there's arguably no better way for a company to improve its profitability than to lay out top dollar
for the best of breed supply chain management software.
Also, while American companies have recently focused on improved information technology
systems, especially those that enhance asset management, international firms will be playing catch-up
for years. They'll eventually flock to the leading providers.
As Gorilla Game authors Geoffrey Moore et al. argue, Manugistics and i2 are both gorilla
candidates in their niche. Because they operate in the applications software arena, both are likely to
continue doing well even if one eventually pulls away. The main danger that could compress earnings
multiples at this point would be a compelling entry by PeopleSoft, a strong chimp in the overall ERP
market and a gorilla in human resources.
While investors should be willing to pay a premium for Manugistics' exceptional growth and market
position, the current price strikes me as a little steep given the evolving competitive pressures and
the stock's volatility. But it's certainly a stock worth watching. |
