Infrastructure for businesses is like the plumbing in a house — mostly unseen but essential, explains growth stock expert Richard Moroney, editor of Dow Theory Forecasts.
For technology companies, the infrastructure might be data centers. For natural-gas companies, it might be pipelines. For many financial companies, it is software made by SS&C Technologies (SSNC).
Founded in 1986, SS&C designs software that automates complex tasks, helping companies trim costs and comply with stricter regulatory requirements.
It operates solely in the financial (about 91% of revenue last year) and healthcare (9%) markets, serving a broad base of 18,000 customers, with its largest client accounting for less than 5% of revenue. Brokerage firms, hedge funds, and registered investment advisers use SS&C software for trading, modeling, and managing portfolios.
SS&C products also help with such back-office functions as performance measurement, tax reporting, and compliance. For financial companies, swapping software providers can be as messy as homeowners ripping the plumbing out of their house.
High switching costs give SS&C pricing power and an excellent revenue-retention rate, averaging more than 90% over the past five years. Contractually recurring revenue represented 97% of the company’s sales last year. Prices for some products are based on the value of clients’ assets under management.
SS&C’s sales have benefited from rising asset prices over the past decade, so a broad sell-off would crimp operating momentum. But contract minimums should help limit the downside of a market downturn.
Just $100 million of its $4.7 billion in annual revenue is directly tied to the S&P 500 Index, while roughly $1.3 billion comes from alternative assets. SS&C has completed 53 acquisitions since 1995, including four deals in 2018 that cost a total of $8.37 billion.
The merger activity contributed to sales doubling last year and cash from operations jumping 36%. Those recent deals should also support growth in the coming year. The midpoint of management’s 2019 guidance calls for earnings per share of $3.74, up 28%, on revenue of $4.74 billion, up 36%.
By comparison, the median software stock in the S&P 1500 Index is projected to grow per share profits 7% and sales 8% this year. SS&C targets organic sales growth of 2% to 4% from a combination of new business, cross-selling, and market appreciation.
Analyst estimates have jumped since SS&C sketched out its outlook in February but still leave room for upside. The stock trades at 17 times estimated 2019 profits, a 54% discount to the industry median.
The shares have a trailing P/E ratio of 22 times earnings, below their own five-year median of 42 and the industry median of 53. If SS&C meets the $3.74 midpoint of management’s per-share profit range and its trailing P/E ratio climbs to 24, the stock would reach $90 over the next 10 months.
The stock has rallied 44% in 2019 but appears to have further to run, given its improving growth prospects and decent valuation. SS&C is a Buy and a Long-Term Buy.
