Despite a 66% gain in 2013, the coming year looks more than promising for Open Text (TSX:OTC) because it finally may have a more balanced mix of acquisition and organic growth, says Comark analyst Richard Tse.
On Thursday, after market close, Open Text will report its Q2, 2014 results. The company is following on a Q1 in which it posted net income of $30.6 million, or $1.37 a share on revenue of $324.5-million.
Tse believes Open Text will post earnings of $1.48 per share on revenue of $353-million in its upcoming Q2.
Tse says Open Text has climbed for the better part of seven years on a growth-by-acquisition strategy. But today, the Cormark analyst says the more elusive organic growth may finally become a driver of the stock, due to its “Red Oxygen” and “Blue Carbon” initiatives.
At Open Text’s user conference in November, much of the talk was about the company’s recently closed $1.16-billion acquisition of GXS Group. GXS, known primarily an operator of EDI (Electronic Data Interchange) networks quietly gives Open Text a majority share of the EDI market, says Tse.
But Red Oxygen and Blue Carbon, respective code names for OpenText’s current line of products and a future line of products that build on the former, have the potential to drive future organic growth that Tse believes are not being priced into the stock.
In a research update to clients this morning, Tse maintained his BUY rating and increased his one-year price target on OpenText to $110, up from his previous target of $95. This target, he explains, implies a valuation of a shade under 17x his fiscal 2015 earnings estimate of $6.55.