Buy Open Text on dips, says National Bank Financial

National Bank Financial analyst Richard Tse says if shares of Open Text (Open Text Stock Quote, Chart, News: TSX, Nasdaq:OTEX) happen to dip, investors should be scooping them up.

Yesterday, OpenText reported its Q3, 2017 results. The company earned (All figures in USD) $21.7-million on revenue of $87.2-million, a 35.4 per cent increase over the same period last year.

“It was a milestone quarter for Open Text as revenues reached $600-million with 36-per-cent year-over-year growth (in constant currency) and operating cash flow grew 46 per cent quarter over quarter,” said Open Text CEO Mark J. Barrenechea. “We are a market leader in enterprise software for digital transformation, and customers are responding favourably to our expanded portfolio of customer experience management, vertical content solutions and discovery offerings. We have invested approximately $2.4-billion in acquisitions over the last 12 months, and while the financial benefits are evident in our quarterly results, they are yet to be fully realized.”

Tse notes that Open Text’s results were slightly below his expectations and the street consensus, but says much of the earnings shortfall were front-loaded costs related to the Dell acquisition, and he expects these to wind down throught the year. But Tse says there was a bigger surprise than that in the quarter, and it’s one that may create opportunity for investors.

“While the shortfall was a blemish, the big surprise for us was the announced departure of President Stephen Murphy,” says the analyst. “While his departure was described as operational streamlining –the optics of the change aren’t positive, particularly for OpenText which has been a volatile stock at the best of times. Yet, when we look back at other Management changes over the years, it has caused a short-term volatility in operating performance which is obviously a risk here given potential gaps in the short-term. The positive is that those historical pullbacks from such changes have often provided an entry point of outsized performance in this name, and given our unchanged investment thesis that’s driven by M&A, we think a pullback in OTEX off the above will once again prove to be an opportunity.”

In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (US) $45.00 on Open Text, implying a return of 31 per cent at the time of publication, including dividend.

Tse thinks Open Text will post EBITDA of $763-million on revenue of $2.29-billion in fiscal 2017. He expects these numbers will improve to EBITDA of $978-million on a topline of $2.71-billion the following year.