Steady Sales Catapult Software Stock
BEDFORD, Mass. (TheStreet) -- When businesses buy software, they sign on for years of maintenance fees paid to the supplier to keep their systems running. That steady revenue stream is often more profitable for software makers than the initial sale.
Stable revenue sources and low overhead costs have helped established software makers generate strong profits, even during the recession. Companies such as
Progress Software
(PRGS) - Get Progress Software Corporation Report
relied on these persistent revenue sources to weather the downturn, and they will likely ride their low-cost businesses to more profits in the recovery.
Bedford, Mass.-based Progress makes software that does everything from trade currencies to detect fraud in retail transactions. For investors, its products aren't as important as its client make-up and cheap shares.
Progress' customers comprise 70% of the
Fortune
100 and include names like
Home Depot
(HD) - Get Home Depot, Inc. Report
,
Hewlett-Packard
and the U.S. Army.
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Progress shares have gained 8.2% this year, trailing behind the
Russell 2000 Technology Index
. But during the past three years, the stock has increased 1.2% annually, on average, while the benchmark lost 0.3%.
With a PEG ratio of 0.8 and a forward price-to-earnings ratio of 14 versus an industry average of 17, the stock looks undervalued. Progress had $55.4 million in free cash flow in 2009 and has already added $32.4 million in the first quarter, up from $2.34 million a year earlier.
Maintenance fees account for about 63% of the company's revenue, indicating that it has enough stable revenue sources to withstand a quarter of poor sales. That is what has buoyed the stock during the past few years when business spending dried up.
Like
Caterpillar
(CAT) - Get Caterpillar Inc. Report
and
3M
, Progress has benefitted from international expansion and diversification. Only 45% of the company's sales come from North America.
Software spending will likely rebound along with other expenses related to business development in the coming quarters. Progress will benefit from that pop and its shares will probably continue to rise. We rate Progress "buy."
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.
