Get it while you can. That should be the thinking about Canadian tech company OpenText (OpenText Stock Quote, Chart, News NASDAQ:OTEX), according to portfolio manager Kim Bolton, who thinks the pullback is an opportunity to grab a great company at a lower price.
Enterprise information management company OpenText has had an up and down year, with the stock currently trading down eight per cent for 2020. That’s after finishing 2019 up 37 per cent and, on a longer time horizon, putting up gains for much of the past decade.
But in the year of COVID-19, OTEX traveled a long way down in the general market downturn earlier in the year and while it made up a lot of that ground, the rally started to stall in September, taking the stock from $47 down to now $40 per share. (All figures in US dollars.)
But Bolton says good companies like this don’t come along every day.
“OpenText develops and sells enterprise information management software, which basically helps digitalize processes and supply chains and it does it through analytics and AI-powered solutions,” said Bolton, president of Black Swan Dexteritas, who spoke on BNN Bloomberg on Thursday.
“The company has a very well diversified client base and recurring revenues but the stock has actually had a bit of a correction, and we’ve been waiting for this,” Bolton said. “We had our first entry point at around $38 and if you go back to the big correction back in March it got all the way down to about $29,” he said. “We’ve got a price target on this of $52.05 — I’d start to nibble away at it here.”
OpenText, which delivers its fiscal first quarter 2021 earnings on November 5, followed by a virtual Investor Day on November 12, last reported earnings in early August where its fourth quarter 2020 featured revenue up 10.6 per cent year-over-year to $826.6 million and adjusted EBITDA up 11.8 per cent to $317.4 million. The full fiscal year saw revenues grow by 8.4 per cent and adjusted EBITDA by 4.3 per cent.
“Fiscal 2020 was a pivotal year for OpenText, highlighting that digital technologies are the key to business resilience. Businesses that build digital capabilities will recover faster and emerge stronger from this pandemic,” said CEO Mark J. Barrenechea in a press release. “[Our] record annual results were delivered against the backdrop of a major global pandemic, demonstrating the durability and resilience of our customers and our business.”
Last month, OpenText underlined its role in the ongoing digital transformation, a global migration of resources and services to the cloud, with the company pointing to results from a commissioned independent study that found the hybrid model, offered by OpenText and involving cloud and on-premises solutions, helps businesses carry out the modernization of content management.
“OpenText, the global leader in Information Management, has been helping companies of all sizes and industries gain an information advantage for over 30 years,” said Savinay Berry, SVP Cloud Services Delivery at OpenText, in a press release. “A hybrid cloud approach provides organizations choice and flexibility. It allows them to manage and grow their content services solutions while expanding functionality and scale.”
Bolton said OpenText has a history of solid performance to draw upon.
“The company has a great client following,” Bolton said. “We do a lot of work with Gartner Research and they have again named OpenText as a leader in the whole sort of Khan content services platform because they consistently maintain that double-digit recurring growth rate.”
“They bought [cybersecurity company Carbonite] last year, then they bought another smaller company called XMedius earlier this year that provides a range of security information transfer, so they’re doing all the right things,” he said.
“And so, if you can buy with a $30-handle on it I would definitely get in there because we have a price target of just over $52,” Bolton said.
Bolton is not alone in liking OTEX. Brian Madden of Goodreid Investment Counsel thinks the stock is good value and is a hold-it-and-forget-about-it buy.
“The stock is at a 20-year compound annual growth rate of 14 per cent, which is triple the overall TSX Composite and head and shoulders above the TSX tech sector which has actually a negative return over that time frame,” said Madden in a BNN Bloomberg spot in July.
“What we’ve noticed in their [latest] quarterly results is that digitization and connectivity and the work from home phenomenon has only further cemented the importance of their types of products in the minds of enterprises, large and small,” Madden said.
Madden said its acquisition habits have been spot on, too, completing over $6 billion in acquisitions since 2014.
“The way they integrate and source and and synergize acquisitions has been nothing short of phenomenal,” Madden said.