BMC's Savvy Purchase of BladeLogic

Although the BladeLogic deal is expected to reduce BMC's 2009 per share earnings by 10 or 11 cents, BMC's estimates for 2009 had already risen by a similar amount. Effectively, the dilution from BladeLogic offsets BMC's organic improvements for a year.

John Hughes and Scott Maragioglio recently said that BMC has been acting well in a difficult environment. The BladeLogic acquisition broke their support levels and would have triggered their stops, however.

Meanwhile, BMC has generated more than $540 million in free cash flow over the last 12 months. Some of that is unsustainable, as it comes from collecting on financed receivables. However, I think the sustainable free cash flow is more than $400 million. That still amounts to a 6.5% free cash flow yield at a time when five-year Treasuries return a paltry 2.2%.

Alternatively, I think the stock can generate double-digit returns over the next few years by virtue of its growth, despite a potential reduction in valuation multiples. Analysts have estimated 15% growth over the next five years, but I think the price-to-book ratio could shrink to 4.5 times from the current 6.5 times to better align with industry norms. That would take 5 percentage points per year off the return, but still allow for 10% annual returns.

The stock is fairly far from the nearest option strike prices, which reduces the value of a put-write approach. However, writing the April $35s for $1.90 would allow an investor to capture 5.6% of any upside from current levels while lowering the effective price to $33.10 if the shares remain below $35 for the next month.

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At the time of publication, Trent had no position in the stocks 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.