A Better, Safer, Cheaper Tech 

09/01/2009 11:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo's Insiders Plus, can find nothing wrong with Sybase to justify its discount to lesser names in software.

My mantra for investing in this dicey market is four phrases, repeated over and over again, while inhaling through my nose, exhaling through my mouth, concentrating on my navel, and keeping my fingers crossed. Those phrases are: very solid balance sheet; large, installed customer base; steady cash flows; and dividends. The first three are non-negotiable demands, as we used to say in the sixties; the dividends are very desirable, but not absolute requirements.

Sybase (NYSE: SY) is an industry leader in software to manage, analyze, and distribute information across all major systems, networks, and devices in the most data-intensive enterprises, such as financial services, telecommunications, manufacturing, and government. To put it concisely: It manages data and makes it available to the many different devices that use it, across the myriad communication protocols that must be traversed to accomplish that.

Sybase customers include large digital advertising networks, worldwide manufacturing companies and sales forces, financial trading companies, bank transaction processors, and power utilities, among many others. While many tech companies delivered better-than-expected Q2 earnings by brutal cost cutting, almost all suffered large, double-digit drops in revenue. Sybase did not. Revenues were down less than 2%, allowing it to earn 43 cents per share, 26% higher than a year ago. Excluding one-time items, profit was 56 cents per share, topping analysts’ estimates by four cents.

The company has a strong current ratio and no long-term debt. Operating cash flow is comfortably above earnings. Net cash at the end of the quarter was up $51 million or 8% to $662 million, despite considerable investments in plant, property and product development.

At the Aug. 21 closing price of $34.86, the shares [were] selling for 15.5 times expected 2009 earnings of $2.25. [The stock closed at $34.85 Monday—Editor.] Growth is expected to be in the 13% range next year; so, on a price/earnings-to-growth ratio, the stock is very reasonably priced, and much more attractive than the vast majority of its peers.

I tried hard to find something not to like about Sybase, but found only a few things to grouse about. No dividend is one, but that’s common for tech stocks. The stock’s ten-year growth rate is only 7.2% compounded, but considering two major market crashes during that time, that’s a very good return, especially for a tech stock. Most of its brethren are very much in the red for that period. Intel, for example, is down more than 60%. Sybase’s five-year return is just under 15%—spectacular for this timeframe.

There are also two patent infringement lawsuits pending against the company, but these are common for tech firms. They’re usually resolved out of court or by some sort of licensing agreement if an infringement is found. You can’t dismiss a company for this sort of thing or you couldn’t invest in 95% of all tech stocks.

Overall, this is a company I’m comfortable owning, even in a bad ongoing recession. It has a lot of upside potential if things go better than expected, and a solid balance sheet and customer base to carry it through hard times. Buy Sybase up to $37.50.

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