In this week's Small-Cap Spotlight, we're shedding some light on an under-the-radar player in the information technology consulting space. Perficient (PRFT) - Get Report is an Austin, Texas-based company that uses third-party software expertise to serve its middle-market customer base.
Larsen: Everything You Want in a Small-Cap
What makes Perficient's story so interesting is the company's surprising resurgence from penny-stock status. Shares of Perficient were trading below $1 as recently as the summer of 2003. But over the past four years, management has secured its place among larger consulting firms, using its expertise in
WebSphere software, as well as other popular business software. This, combined with a savvy acquisition strategy, has driven shares to their current level around $23.
Perficient serves as a case study of a company that salvaged itself from the post-tech boom wasteland to find its niche in the business software market. Following the shake-out earlier this decade, all that was left on the IT consulting landscape were a few large players like
Electronic Data Systems
. Perficient seized on the opportunity created by these giants' inability or unwillingness to target the small and midsize businesses that make up Perficient's customer base.
The results speak for themselves. Perficient has posted revenue growth in every quarter for over four years now. Most recently, the company's second-quarter results -- reported Aug. 8 -- showed revenue up 40% vs. the same period last year, with earnings per share reaching 13 cents compared to 8 cents last year (up 62.5%).
As I've written in this space before, small-cap investors should crave growth -- and Perficient has been on a tear. Revenue growth was a surprisingly steady 65% and 66% in 2005 and 2006, respectively. It's important to note that the company has been an aggressive acquirer of smaller firms, so the historical growth benefits slightly from the high growth rate of the smaller players that Perficient chooses to snatch up.
Nevertheless, current consensus estimates have the company increasing revenue at a 33.5% rate in 2007. More importantly, earnings growth should be 50% for this year, and then advance another 17% in 2008, according to analyst estimates.
Acquisitions have played a major role in Perficient setting itself up for sustainable future growth. In late June, the company announced the acquisition of Tier1 Innovation, an IT consulting firm specializing in Oracle software and its Siebel CRM (customer relationship management) segment. Transactions such as these allow Perficient to expand its offerings, its ability to take on larger projects and its geographic reach. The Tier1 deal, for instance, brought on 40 additional consultants, added $11 million in annual revenue and strengthened the company's presence in the Denver area.
Management has a clear taste for acquisitions, but has yet to bite off more than it can chew. While many buyout-happy management teams rack up a heavy debt load, Perficient's long-term debt is currently zero.
Heading into earnings a month ago, Perficient's stock pulled back on fears that growth would slow as a result of a cutback in business spending. However, the quarter came in a penny ahead of expectations, and shares rallied sharply over the following three days to establish a new 52-week high. The question for investors now is can shares maintain their upward momentum for the rest of 2007 and perhaps into 2008?
Like many fast growers, Perficient's revenue-growth rate should slow over time. However, this slowdown has already been widely discussed by Wall Street analysts. In fact, I would say that one of the reasons shares should move higher over the next year is the fact that analysts and investors are so wary about a potential drop in the growth rate.
This is why there was a selloff ahead of the most recent quarterly results early last month. The simple truth is that Perficient delivers solid results each quarter, and I would much rather be riding strong
fundamentals than betting against them.
Frank: Take Perficient Profits
It's hard to overtly criticize a company that has done everything right over the past four years, as my colleague Larsen pointed out. Perficient has been able to grow its business organically and through strategic acquisitions, and management's execution has been spot-on, resulting in solid returns for shareholders.
However, based on last quarter's results, which showed a clear sign of a slowdown in organic growth, and management's overly optimistic guidance, I would take some profits at the current price.
Perficient reported second-quarter results in early August that were mostly in line with estimates. But organic growth -- a.k.a. growth from existing operations -- fell to just 10% from the 20% rate posted in the previous quarter. In other words, in order for the company to achieve the 33% growth rate that Larsen highlighted above, or to reach its 90 cents to $1 earnings estimate for 2008 that was given by the company last quarter, management will have to acquire companies.
From my experience covering small-cap stocks, it's rare to see a company give guidance that includes future acquisitions that have yet to be announced. Based on management history since 2004, which includes 10 acquisitions for less than one-times sales on average, Perficient could certainly achieve its earnings estimates goal through takeovers. Also, the company has a strong balance sheet and a $51 million credit facility, which is more than the company paid for its last three acquisitions combined.
But with organic growth slowing, the landscape for management has changed from a "strategic acquisition" to a "must acquire to meet estimates" company, and that could result in untimely and less-effective transactions.
On the valuation front, shares are trading at 25 times 2008 earnings estimates and analysts expect earnings to slow to 17% in the same year. The considerable drop in the growth rate suggests that the company is maturing. That is a testament to management's successful execution in growing the business since 2003, but it is also a negative in terms of price appreciation potential.
Based on management's ability to grow its business through acquisitions, it's possible that Perficient could meet or even exceed earnings estimates for full-year 2007 and even 2008. But based on the steep decline in growth from existing operations, these estimates seem far-fetched, and I would look to take some cash off the table after its very nice run.