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Standard & Poor's


07/21/14 10:12:53 AM



This week's Focus Stock of the Week is TIBCO Software (TIBX $19.41), which carries S&P Capital IQ's highest investment recommendation of 5-STARS, or Strong Buy. We believe TIBX operates in the attractive growth area of software but has experienced recent execution issues, resulting in the shares trading at a significant P/E discount to peers, and being targeted by an activist investor. We believe revenue growth and EBITDA margins will bottom this year and that the company could garner interest from would-be strategic and/or financial acquirers.

TIBX is an independent provider of infrastructure and business intelligence software. We see the company as deeply involved in and leveraged to the theme of "big data." TIBX sees its software as uniquely capable of correlating, in real-time, information about an organization's operations and performance, with information about expected behaviors and business rules. These correlations can enable clients to anticipate customer needs, capitalize on new opportunities, and avoid potential problems in a more beneficial way than using more traditional applications. TIBX's solutions help customers operate their business more efficiently, better capitalize on opportunities to increase revenues and market share, and extend the life of past investments. Importantly, we believe TIBX can help enterprises increase revenues, reduce expenses, and improve productivity, and thus we see the company and its offering as less cyclical than some other software companies.

Sales to customers outside the U.S. represented 48% of revenues in fiscal 2013 (ended Nov.) and 49% of revenues in fiscal 2012. We believe improving economic conditions in Europe could become a notable positive for the company, which accounted for about a third of its revenues in fiscal 2013.

Acquisitions have contributed to the growth of TIBX's revenues, earnings and balance sheet. In April 2014, TIBX bought Jaspersoft, a provider of embedded business intelligence and reporting software, for $183 million, net of cash acquired. In April 2012, TIBX acquired LogLogic, a provider of log and security management platforms, for $132 million, net of cash acquired.

We project that revenues will rise 3% in fiscal 2014 and 8% in fiscal 2015, after a 4% gain in fiscal 2013. Thus far, fiscal 2014 has been adversely affected by challenges in the Spotfire business intelligence analytics area. However, we see TIBX's end-markets recovering, sales people becoming more fully trained and efficient, and business execution improving.

We forecast non-GAAP EPS of $0.93 for fiscal 2014 and $1.13 for fiscal 2015, following $1.15 in fiscal 2012 and $1.06 in fiscal 2013. In April 2013, TIBX announced a $300 million buyback program.

In June 2014, Praesidium Investment Management announced an interest in an activist campaign involving the company, noting the significant underperformance of the company and stock. Praesidium was involved in what we consider a successful activist action involving clothing retail Jos. A Bank earlier this year.

From July 17, 2013 to July 16, 2014, the S&P 400 MidCap index (in which TIBX is a constituent) rose 15% and the S&P 500 Application Software sub-industry rose 31%; however, TIBX declined 21%. From July 18, 2011 to July 16, 2014, the S&P 400 rose 46% and the Application Software group rose 59%, while TIBX declined 30%.

We upgraded our opinion on the shares to Strong Buy from Buy in June 2014, reflecting what we see as a solid growth profile and an attractive valuation, notwithstanding some execution issues. TIBX preannounced disappointing May-quarter results, reflecting challenges involving its Spotfire business. Nonetheless, we see expectations and sentiment as sufficiently low. Short interest as a percentage of shares outstanding was recently 2.6%, nearly a high over the past year (August 2013).

Our 12-month target price of $29 is derived by utilizing a relative P/E and P/E-to-growth analysis involving the S&P 1500 Application Software sub-industry. We believe TIBX should trade comparably to this group, notwithstanding recent execution difficulties, given the aforementioned activist activity and what we see as the potential for favorable M&A developments. At recent levels, TIBX's P/E was around half that of the Application Software sub-industry (17X vs. 33X). We acknowledge lower expected growth for TIBX, but as indicated, we see top-line and bottom-line gains improving in the coming years.

Risks to our opinion and target price include the potential for continuing execution issues, global economic uncertainties that could result in enterprise IT spending challenges, increasing competition from larger vendors, and dependence on large deals to meet quarterly targets.

S&P's views on stocks are constantly re-evaluated. Please refer to our most recent publication on this stock to see our current view.


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