Technical Promise & a Dividend, Too!

11/10/2006 12:00 am EST

Focus:

John Buckingham

Editor, The Prudent Speculator

Finding undervalued technology companies is not always easy, but John Buckingham and Mark Mowrey have a knack for uncovering potential winners. Here, they take a look at a techie with a very nice dividend yield.

"American Software's (AMSWA NASDAQ GS) fantastic balance sheet, containing $2.61 per share in cash and near cash, high yield of 4.6% and consistent profitability leave the small-cap name without many peers. The company's chosen marketplace offers ample opportunity to evolve, expanding addressable markets. Plus, the still unwieldy list of providers remains in dire need of consolidation, despite fervid activity of late, with American being an attractive target in our eyes.

"American Software is a 36-year old supply chain management (SCM) and enterprise resource planning (ERP) software provider, also offering IT consulting services. American's SCM software, delivered through Logility, its 88%-owned subsidiary, is used to optimize the forecasting, production, distribution, and management of products within a company's supply chain.

"The company's ERP software is used for purchasing and materials management, customer order processing, financial, e-commerce, 'Flow Manufacturing' and traditional manufacturing solutions.

"SCM software helps customers track product flow outside the company, while ERP software helps them manage the flow of data within the organization. The primary goal of both is to save money through the reduction of redundant paperwork, better tracking of assets and enhanced financial and operational reporting that enables better decision making.

"A small fry fighting other small fries among giants, American Software competes with Oracle and SAP. And since the ERP space is also chock full of handfuls of smaller players, there always seems to be another company willing to come in and steal a deal from under another using price as a weapon. Those factors led to deteriorating results from the ERP biz during fiscal 2006.

"Happily, the SCM and IT consulting segments took up the slack. Management considers its SCM offerings 'best of breed' and believes its combination of SCM and ERP should allow the company to grow faster than the mid to high single-digit range industry forecasters predict. Its relatively more powerful offering bumps the target customer revenue range to $100 billion, enlarging the potential marketplace. Further, the company's cash-heavy balance sheet eases customer worries.

"The proof is in the growth of the top line. Over the past seven quarters, American Software has managed double-digit revenue gains, with trailing four-quarter revenue hitting $80.0 million, a level not seen since October 2000's $84.3 million. And growth is happening in all three businesses, suggesting the triple-digit revenue mark may come sooner than earlier thought. Meantime, the generous yield will reward us as we await further capital gains."

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