Investing

Hot Stock: Open Text

Another Waterloo success story

(Google)

(Photo: Google)

With Facebook’s stock reaching all-time highs and Twitter announcing an IPO, you may be thinking that now’s a good time to add a tech stock to your portfolio. Rather than taking a bet on a fast-moving U.S. social media stock, consider owning a homegrown software company instead.

Waterloo, Ont.-based Open Text (TSX: OTC) sells a number of programs that help companies run their businesses more efficiently. Its software can manage internal emails and data, customer communications, business processes and much more.

Many fund managers like this tech company, so it’s no surprise that its stock price has appreciated by 34% so far this year. However, more than half the analysts who cover the business think its share price can rise even further.

Its main attraction is Open Text’s track record of buying good companies that can quickly impact the bottom line. Paul Steep, an analyst with Scotia Capital, points out that the company has completed more than 36 acquisitions and has invested more than $2.3 billion in those purchases since 1998.

That model for growth will continue to serve them well in the future, he says. “Open Text continues to build on its reputation as a disciplined acquirer seeking transactions that fit with its strategic focus on the enterprise information management market and value creation for shareholders,” he wrote in an Aug. 21 report.

Its latest purchase took place on Aug. 16, when it bought Cordys, a Netherlands-based company that makes business process management software, for $33 million. Paul Treiber, an analyst with RBC Capital Markets, likes the deal. It brings in brand-name clients, such as Siemens and Schneider Electric, and the company was bought at a multiple below some of Open Text’s other buys.  “Cordys shows Open Text’s discipline in its ‘value’ approach to acquisitions,” says Treiber.

Over the long-term, Steep expects to see the company generate around 20% return on invested capital. He estimates 2014 earnings to come in at $5.72 a share, above the $5.57 EPS it posted this year.

It’s also an attractively priced stock, trading at about 11.8 times 2014 earnings. That’s far below where many of the “hot” American tech stocks are trading at today.

If it continues to acquire more, and can build on its existing base, its stock price will likely climb. Treiber thinks shares, which sit at $74 today, can hit $88, while Steep says it will hit $90 over the next 12 months.