There’s not a whole lot to choose from in the Canadian enterprise software space but two names that have done well of late would be OpenText (OpenText Stock Quote, Charts, News, Analysts, Financials TSX:OTEX) and Enghouse Systems (Enghouse Systems Stock Quote, Charts, News, Analysts, Financials TSX:ENGH). For investors looking to spot the differences, here’s a Cantech comparison: OTEX vs. ENGH.
First, on operations, OpenText is an information management software company with a slew of products covering fields such as content management, digital experience management, process automation, business networking, case management, AI and analytics and security. Headquartered in Waterloo, Ontario, OTEX has been a serial acquirer of companies over the years, expanding its lineup of products and services. The most recent major pickup of note was US data protection and endpoint security company Carbonite, bought for $1.45 billion back in 2019.
Enghouse, also Ontario-headquartered but in Markham, offers products in remote work, visual computing and next-generation networks. Under its Interactive Management segment, Enghouse has a contact centre software and services business and Vidyo, the company’s video collaboration technology and cloud-based operations. Under its Asset Management segment the company has telecommunications business Enghouse Networks and Enghouse Transportation & Public Safety. And like OpenText, Enghouse is big on M&A, so far in 2021 making notable acquisitions in market research and analytics company Nebu BV and video software company Momindum.
Size-wise, OpenText is much larger, with over 14,000 employees worldwide and a market capitalization of $18.9 billion compared to Enghouse’s about 1,700 employees and market cap of about $3.5 billion. OTEX is the bigger company by revenue, too, at $893.5 million for its latest quarter (its fiscal fourth 2021) compared to ENGH’s $117.3 million for its fiscal second 2021. OpenText made a profit of $310.7 million for that quarter while ENGH’s net income was $20.7 million.
On the stock, both OTEX and ENGH offer a dividend, which is a nice bonus in the tech investment field — Opentext’s yield is currently at about 1.6 per cent and Enghouse is at one per cent. And while both stocks have had good runs over the summer — since June 1, both OTEX and ENGH are up about 21 per cent — the longer picture looks different, with Enghouse having been a beneficiary of early-pandemic tech-related tailwinds while OpenText struggled to push out of the COVID slump.
Interestingly, the two stocks then took different paths over the first half of 2021, where ENGH kept dropping while OTEX levelled off and then started climbing. Year-to-date, Enghouse is currently up just two per cent while OpenText is now up almost 20 per cent.
What does the future hold for OpenText and Enghouse? That depends on who you ask, of course.
In Enghouse’s case, portfolio manager Jordan Zinberg of Bedford Park Capital recently spoke about the company, saying Enghouse’s strong M&A track record is perhaps more under the microscope at the moment, as earnings haven’t grown with the company as much as some might have expected.
“In contrast to Constellation Software, Enghouse tends to buy more medium quality assets that they can buy very cheaply as opposed to trying to buy high quality assets that they might have to pay up a bit. What they’re very good at is buying those types of assets and then repositioning them, and management is very well known in Canadian tech circles,” said Zinberg, speaking on BNN Bloomberg in August.
“The stock has come off a bit, and I think the reason is we’ve seen some deterioration in their return on invested capital,” he said. “I believe the multiples are somewhere around 17-18x earnings right now, which is approximately equal to their growth rate.”
“So, I would say if you own some, you can hold it — you’re definitely not going to get hurt with it. [But] it wouldn’t be my top pick in the Canadian tech space,” Zinberg said.
On OpenText, portfolio manager Darren Sissons likes the company and stock but he thinks that investors should know what they’re getting into with OTEX: a capable performer but not a growth stock of the typical tech variety.
“I think it’s a fine company and it’s probably good for people who are in the slow ‘Get Rich’ camp where they don’t want to trade a lot. They just want to buy a good quality name and just hold for longer periods of time, and it will gradually increase in value. That’s the kind of stock we have with OpenText,” said Sissons of Campbell Lee & Ross, speaking on BNN Bloomberg in July.
Speaking before OTEX really started to break out last month, Sissons said, “So, at these levels I would be more than fine to buy this. I think this is a fine name and I have no problem owning it here.”
Lastly, on a longer term horizon, OpenText has returned about 350 per cent over the past ten years whereas Enghouse has delivered about 1180 per cent.
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