As it stock creeps down to year-long lows, National Bank Financial analyst Richard Tse says investors should be buying OpenText (TSX, Nasdaq:OTEX).
In a research update to clients Wednesday, Tse maintained his “Outperform” rating and one-year price target of (U.S.) $45.00 on OpenText, implying a return of 43 per cent at the time of publication.
Tse, in yesterday’s note, looked to pinpoint the reasons for softness in the company’s stock.
“With OpenText around its 52 week low – the two obvious questions are why and what do I do now? In our view, the pullback in OTEX has been due to a shift in sentiment this past year (until recently) into high organic growth names like Shopify and Kinaxis that have attributes similar to those high flying U.S. technology stocks,” the analyst says. “Beyond that, we believe the pullback in OTEX has also been driven by a view that the Company’s growth engine of acquisitions is about to pause given a number of transactions that’s amounted to +$2 bln in capital deployed over the trailing 4 quarters.”
Tse says there are several reasons to be a buyer of OpenText right now, including his assessment that the company is through an inflection point with regards to its acquisition of ECD this past summer, the fact that the stock is trading at a valuation discount to its average five-year P/E, and that the stock has defensive qualities that may become more attractive to investors who have ratcheted up organic high
growth technology stocks.
“All in, we continue to see a growing base of recurring revenue through M&A, expanding operating leverage and optionality from what we believe to be developing organic growth that’s not priced into the stock – not to mention a positive upward revision in the Company’s target model in its most recent quarter,” Tse adds.
Tse believes OpenText will post EBITDA of $972.0-million on revenue of $2.83-billion in fiscal 2018. He expects those numbers will improve to EBITDA of $1.13-billion on a topline of $3.18-billion the following year.