American Software: Buy a company for free
October 5, 2007 2:42 pm SmartGuyAB Picks- Buy AMSWA around 9.23
The recent success of EMC, which I recommended on the virtue of its discounted ownership of VMWare, has led me to another stock whose valuation appears out of whack. American Software, Inc. (NASDAQ: AMSWA) develops, sells, and services software for supply chain management. The company is growing nicely - 1Q 2008 revenue and earnings came in 8% and 40% respectively ahead of last year, and analysts expect 10% top line and 16% income growth for the full fiscal year.
But like EMC, the most compelling part of the American Software story is value, not growth. An inital look shows that AMSWA’s PE of 26 and P/S of 2.78 are slightly below industry averages. But digging a little deeper exposes the true value underlying AMSWA. The company has $75M in cash and no debt. It owns 88% of another supply chain management company, Logility (NASDAQ: LGTY), a stake that is currently worth over $166M. Add that together, and the total value of $241M exceeds AMSWA’s current market cap of $238M. Throw on top of this a healthy cash flow more than adequate to cover the recently-raised 3.9% dividend, and it really does look like you can buy this company for free.
The best part is that this value discrepancy looks to be a short-term aberation. A 6 month chart shows that as you would expect, the price of AMSWA usually tracks LGTY:
But in the past month AMSWA has lost over $50M in market value, while the value of its stake in LGTY has actually increased more than $50M. Apparently, this is a result of AMSWA’s first quarter growth slightly missing analyst expectations and LGTY reporting blow-out numbers on the same day. The market’s recent infatuation with LGTY and disfavor for AMSWA has overlooked the fact that they are one and the same. While it certainly doesn’t seem to make sense, I’m happy to take advantage of the opportunity.
Disclosure: SmartGuyAB is long AMSWA
October 6th, 2007 at 11:15 pm
But doesn’t the cash that AMSWA owns include the 30M cash that is part of LGTY which is already accounted for in the market capital?
October 7th, 2007 at 12:13 am
AMSWA has suffered an operating loss in its ERP part of the business. This gives a valid reason why the two stocks are going in opposite directions.
October 9th, 2007 at 10:18 am
AMSWA is a conservatively run company with 0 long term debt (very healthy) and they own their building (no leasing of space for their people).
Overall, it’s a sleeper stock… when tech moves, they move…
I totally agree that it is a good bargain … have bought some… now will hold it for awhile and let it SLOWLY come up and up… NOT a fast riser like many stocks today, it needs VIAGRA in the management group, to make this a rising star again!
October 12th, 2007 at 4:32 pm
Today, an article came out on SeekingAlpha asserting that AMSWA is fairly valued. There has been a lot of debate on various message boards about how to accurately value AMSWA. A lot of the debate is whether to separate LGTY’s ~36M cash position out of AMSWA’s ~76M cash hoard. Although I’m no CPA, I’ve come to believe that was incorrect in my initial calculation, and that LGTY’s cash should be broken out as it is already captured in LGTY’s valuation. Given that, I figure that AMSWA is worth 166M (88% of LGTY) + 40M (cash) = 206M + the value of the company’s operations. Last year, AMSWA’s own operations earned 3.2M in net income. Seeing that the business isn’t growing much, assigning a 12.5 PE seems appropriate, resulting in another 40M. That gives a total of 246M. AMSWA closed at 233M today.
But that doesn’t capture the full value, as AMSWA generates a ton of cash and pays out a hefty dividend. From a discounted cash flow perspective, if you assume that AMSWA (without LGTY) produces the same 7M in cash flow that it generated in 2007 into perpetuity, with a 10% discount rate, the present value is 70M, bringing the total fair value to 276M.
No matter how you dice it, AMSWA is undervalued at this point.
October 26th, 2007 at 4:15 pm
You’re wrong about whether the business is growing. The Enterprise Resource Planning and Consulting divisions have each had a number of big wins in the past few months, also not reflected in the stock price. The market probably won’t take note of these news items until the next quarterly report comes out in a few weeks.