In this article, let's take a look at Teradata Corporation (TDC, Financial), a $150.37 billion market cap company that spun off from NCR Corp. (NCR) in 2007 and has global operations focused on data warehousing and enterprise analytics.
Evolving environment
This Ohio-based company has offices throughout the Americas operating in 60 countries, which accounted for almost 40% of 2013 revenues.
New database and analytics technologies are growing at a great path leaving behind the structured data warehouses. So, spending on data warehousing solutions and analytics is probable they will grow for the next five years.
We think the company would expand at its own pace, in a world of new platforms and applications while raising funds. The competition on price and quality of products and services is high and companies such as eBay (EBAY, Financial) and Walmart (WMT, Financial) depend on Teradata's technology to manage the data warehouse.
Main risks
One principal risk is that it is easy to switch away from a Teradata database. Further, the firm has some competitors that have greater resources for R&D. IBM (IBM, Financial), Oracle (ORCL, Financial), and Microsoft (MSFT, Financial) have greater financial resources to invest.
Revenues, margins and profitability
Looking at profitability, revenue grew by 0.15% led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($0.60 vs $0.59).
The gross profit margin is rather high at 59.22%, but it has decreased from the same period last year. The net profit margin of 13.18% is ranked higher than 92% of the 2639 Companies in the Data Storage industry.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| TDC | Teradata | 19.35 |
| IT | Gartner Inc | 73.26 |
| SAPE | Sapient Corp | 13.44 |
| Â | Industry Median | 5.75 |
The company has a current ROE of 19.35% which is higher than the one exhibit by Sapient (SAPE, Financial).In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, Gartner (IT, Financial) could be the option. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.0x, trading at a discount compared to an average of 32.9x for the industry. To use another metric, its price-to-book ratio of 3.8x indicates a premium versus the industry average of 1.66x while the price-to-sales ratio of 2.64x is above the industry average of 0.98x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $14,662, which represents a 7.9% compound annual growth rate (CAGR).
It has closed at a price level that was not very different from the one registered one year earlier.
Final comment
Several competitors are trying to make strategic moves to the new era in the industry. Although some competitors have more capacity to invest, the firm tries to invest heavily in R&D.
The PE relative valuation and the return on equity that significantly exceeds the industry average and make me feel bullish on this stock.
Hedge fund gurus like Chuck Royce (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), Robert Olstein (Trades, Portfolio), Jean-Marie Eveillard (Trades, Portfolio), Charles de Vaulx (Trades, Portfolio) and HOTCHKIS & WILEY have added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
