THE GUN: AN INVESTMENT OPPORTUNITY EMERGES IN PRGS
***PRGS sold on March 28th, 2012 +27% since posting
It has been awhile since I posted a report on a potential investment in an individual company. Let's see if I can shake the rust off.
I came across PRGS (Progress Software) recently. Well-established software companies typically possess two key attributes:
1. Their business is extremely cyclical in nature
2. They are free cash flow machines
This means that when a negative cycle kicks in, lowering per share price, it is typically a good time to buy into well-established companies with a history of solid management and free cash flow generation.
PRGS has been getting beat up recently as it attempts to transition away from one segment of the marketplace to another. In the meantime, their growth has grinded to a halt, forcing the company to cut forecasts when they announced earnings on January 3rd.
This cycle of disappointment has led the company on a rendezvous with the bearish segment of cyclicality within the software sector. The company has fallen from a high of $30 per share a year ago to its current price in the $18 range.
Certainly a director within the company thinks it's time to buy as he bought $500,000 worth of the stock for himself on the 11th of January.
Let's look at some of the key valuation metrics on a historical basis:
click chart to enlarge
The most significant risk to PRGS comes with management's inability to execute on their ongoing transition. This would compromise the position of the company and allow competition to diminish their market share, causing management to further lower future estimates. This outcome could take the share price to the $12-$13 range.
