OpenText stock is cheap, this portfolio manager says

Shares of OpenText Corp (OpenText Quote, Chart TSX, NADSAQ:OTEX) are up over nine per cent for the year so far, but investors are still going to be rewarded by this stock, says Lyle Stein of Vestcap Investment Management, who thinks OpenText stock remains undervalued.

Waterloo, Ontario-based OpenText had a pretty good run over the summer, with its share price rising from a low in May of $42.55 to the high $51-range by the end of August. The company benefitted from a promising fiscal fourth quarter reported on August 2, which featured quarterly revenue of US$754 million, a 14 per cent year-over-year increase, and annual revenue of US$2.282 billion, a 23 per cent increase. Those numbers came alongside a Q4 Adjusted EBITDA of US$281.8 million, itself an 18.9 per cent improvement on Q4/17.

“Our fourth quarter was a strong close to a record year,” said CEO and CTO Mark J. Barrenechea. “Fiscal 2018 demonstrates the strength of our Total Growth strategy that combines both acquisition and organic growth. Further, we completed three acquisitions in Fiscal 2018 (Covisint, Guidance Software and Hightail) and we enter Fiscal 2019 with a strong balance sheet.”

Stein says OpenText is just one example of Canada’s proven excellence in the software field.

“The reason we bought it is that it had really lagged that whole software group,” says Stein, senior portfolio manager and managing director at Vestcap, to BNN Bloomberg. “You know, Canada is really good at software implementation that an OpenText or an Enghouse Systems or a Constellation Software does. That’s our niche.”

“OpenText made a big acquisition and that caused the stock to tumble and integration became a little bit of a concern and that’s when we bought it,” says Stein. “When the Street didn’t like it, we said, ‘This is a pretty good deal, this is a pretty cheap stock.’ That was in the [$40 range], now it’s in the $50s.”

Last year, OpenText closed on the purchase of Dell EMC’s enterprise content division for US$1.62 billion, the largest deal yet for the company and one which made it the world’s largest software vendor for enterprise information management.

Over the past two weeks, OTEX has had a bit of a pullback in its share price, but Stein says he’s not worried. “When it falls over a couple of days, I don’t get overly fussed about that,” he says. “I think the stock will have momentum going forward, as the full fruits of that acquisition they just made come into play. I like that, I like to be ahead of the guys who are going to say, ‘Oh, earnings growth is good, better than expected.’ Those guys can come in behind me.”