With its stock flagging of late, National Bank Financial analyst Richard Tse says this is a good time to be looking at Open Text (TSX, Nasdaq: OTEX).
In a research update to clients today, Tse maintained his “Outperform” rating and one-year price target of (U.S.) $50.00 on Open Text, implying a return of 45 per cent at the time of publication, including dividend.
Though the general trend since late last year has been upward with the stock, a pullback in the second half of June is an opportunity for investors, the NBF analyst says.
“On the heels of OpenText’s annual user conference (Enterprise World 2018, July 10-12) and fiscal Q4 (June) results, we thought it would be worthwhile to provide some broad perspective on what could be viewed as a polarizing name,” the analyst said. “More importantly, we show why over the long-term this name has been so compelling, particularly off the pullbacks. This is particularly relevant as the stock has not done much this year, up only 3% on the TSX and down around 2% on the Nasdaq. This note looks at why we think the stock has been muted this year and why we think it continues to be a compelling name within our coverage universe by contrasting the short-versus-long-term performance in the stock price.”
Tse says there is much to like about Canada’s largest software company.
“Investors following our research will know we currently like OpenText – we see an undervalued stock that’s not pricing in the underlying fundamentals that’s underscored by scaling operating cash flow towards $1 billion by 2020,” the analyst explains. “If that weren’t enough, we think there’s been a growing relative valuation gap in light of what we believe to be a compelling fundamental outlook not to mention the defensive attributes that come with recurring cash flow.”
Tse thinks Open Text will generate EBITDA of $997-million on revenue of $2.81-billion in fiscal 2018. He expects those numbers will improve to EBITDA of $1.11-billion on a topline of $3.07-billion the following year.