Tyler Tech: Public Sector Profits

12/11/2015 7:00 am EST

Focus: STOCKS

Timothy Lutts

Publisher, Cabot Heritage Corporation

Our latest featured recommendation remains unknown to most investors. Still, the long-term growth prospects remain enticing, explains Timothy Lutts, editor of Cabot Stock of the Month.

Tyler Technologies (TYL), headquartered in Plano, Texas, doesn't even have a Wikipedia page; that's one indication of how much it's out of the public eye.

Yet it's very much dependent on the public for its business, as all its customers are government offices.

Numbering more than 13,000 local offices in all 50 US states (as well as other English-speaking countries), civil servants are growing increasingly dependent on Tyler for the software they need to do their jobs.

So what are the programs that Tyler provides? By my count, there are at least 30 of them. Examples include software for accounting, appraisal and taxes, personnel management for schools, courts and civil process, and student transportation management.

That's a lot, but something was missing. So in May, the company acquired Brazos Technology, a provider of mobile hand-held solutions used by law enforcement to issue citations and report accidents.

So now Tyler is number one in public safety and number one in public sector software in general.

Tyler has grown earnings at least 20% in each of the last seven quarters and analysts are projecting 35% growth in 2016. Cash flow growth is impressive at 36%, much higher than the 13.8% industry average.

After-tax profit margins just hit 17.0%, the highest number in the past five years. And the company has no debt. All of which is excellent.

But then there's the matter of Tyler's P/E ratio. Right now it's 69. That's not only pretty close to its highest level in recent years; it's also a number that will stop many fundamental investors cold.

But remember the acquisitions, which will increase earnings at least 35% next year; the stock's forward PE ratio is just 49. And remember the fact that the best growth companies typically sell for high multiples.

The big investors in Tyler see capable management that has the potential to grow the company several-fold as it consolidates its industry-and governments-move slowly but steadily out of the pencil-and-paper era.

And these investors are willing to pay up to own a part of it. I agree and recommend purchase of the shares.

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