ACI Worldwide Falls Short of Its Price

With the stock market flirting with "official" bear market territory, I realized I hadn't written a bearish piece in a couple of months. Not wanting to buck the trend any longer, I decided to look through the models I follow to see which stocks might be on the pricey side. I think I found one in ACI Worldwide (ACIW - commentary - Cramer's Take).

ACI develops, markets, installs and supports a broad line of software products and services primarily focused on facilitating electronic payments. The company's products and services compete with offerings by Fiserv (FISV - commentary - Cramer's Take), Fidelity National Information Systems (FIS - commentary - Cramer's Take), S1 Corporation (SONE - commentary - Cramer's Take), Metavante (MV - commentary - Cramer's Take), Euronet (EEFT - commentary - Cramer's Take), Fair Isaac (FIC - commentary - Cramer's Take), Visa (V - commentary - Cramer's Take) and MasterCard (MA - commentary - Cramer's Take).

One of the key risk factors ACI notes in its 10K is that "A lessening demand in either the overall economy, the software sector or the financial services industry could result in reduced capital spending by our customers, longer sales cycles, deferral or delay of purchase commitments for our products and increased price competition which could lead to a material decrease in our future revenues and earnings." Hate to say it, but it sounds like that could be happening.

'Lessening Demand'

Most investors like to see a company report higher earnings than analysts were expecting. To say ACI has failed to do so would be an understatement. ACI has blown at least the last four consecutive quarters, usually by a very wide margin. In fact, if you sum up the last four quarters of estimates, the company was supposed to earn 62 cents per share. Actual earnings? A loss of a nickel.

What's really scary is that these misses have more than likely been against estimates that had already come down. For the current quarter, next quarter, the full year and next year, consensus expectations have been brought down sharply. Missing these already-lowered estimates amounts to salt on the wound.

What earnings ACI Worldwide appears to have also appear to be of low quality, at least as measured by the accrual ratio. The accrual ratio measures earnings quality as the difference between cash earnings and accounting-based earnings, or the change in net operating assets divided by average net operating assets. An accrual ratio close to zero indicates high earnings quality. ACI's has always been volatile and has been declining for several quarters.

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At the time of publication, Trent had no positions in the companies mentioned, although positions may change at any time.

William A. Trent, CFA, is a freelance equity analyst based in the New York metro area. He has been an equity analyst since 1996 and is co-author of Understanding and Evaluating Prospectuses, Offering Documents, and Proxy Statements. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Trent appreciates your feedback; click here to send him an email.