Hot Stock: Catamaran Corp.

High-flier a takeover target?

When most people think of Canadian tech companies only one business typically comes to mind: BlackBerry. But while the domestic technology sector is small—it accounts for about 1.6% of the S&P/TSX Composite Index—there is more to look at than the once mighty smartphone giant.

One company that’s done exceptionally well over the last five years is Catamaran Corp (TSX: CCT). This Canadian listed Lisle, Ill.-based operation (it was once headquartered in Milton, Ont.) sells pharmacy benefit and medical record-keeping software to businesses in the U.S. Since May 30, 2008, the company’s stock has skyrocketed 522%.

Despite that rise, Ian Ainsworth, senior vice-president of investments at Mackenzie Financial, thinks it’s still a strong buy. In fact, now could be an ideal time to buy in. Over the last month, the stock has fallen by 13% because, says Ainsworth, there’s some risk that it could lose its biggest client.

Cigna, a company that sells life, health, dental and disability insurance, accounts for 6% of the Catamaran’s revenues. Its contract is over, so it’s shopping around to see what else is out there. While Catamaran may win them back, there are some worries that it will go elsewhere, hence the stock price drop.

However, Ainsworth thinks the market is being too pessimistic and that while Cigna’s business is important, it’s still a fast-growing company that will recover. Over the last five years, Catamaran has grown from an $80 million revenue business into a $9 billion dollar revenue generating company and he expects it to make $16 billion by the end of next year.

Its growth is partly due to frequent acquisitions of smaller, but similar, companies; since 2011 it’s purchased five businesses. It’s also a cash cow, as it collects recurring revenues from clients. Ainsworth points out that it should have around $500 million in free cash flow next year.

Currently, the company is trading at about 25 times earnings and with a long-term earnings per share growth rate of about 15%, its price-to-earnings to growth ratio—a metric used to value fast growing companies—is about 1.4. The S&P 500’s PEG ratio is around the same. Ainsworth thinks that’s a good price to pay for a company that’s growing so quickly.

He also points out that this is a takeover target. While he can’t predict when it’ll be bought out, he’s fairly confident that a larger player, like Express Scripts, will purchase it at some point.

Although investors may not see 500% plus returns over the next five years—it’s hard to repeat that kind of performance—Ainsworth thinks its share price hasn’t finished rising yet.

For more investing insights, follow Bryan on Twitter @bborzyko.