Should You Buy It: Parametric Poised for Profit

Parametric Technology ( PMTC), a leading maker of engineering software, has its designs on a turnaround.

Parametric gained 12% Wednesday to close at $15.79 after delivering better-than-expected fiscal first-quarter (ended December) results before the opening bell. The company earned 26 cents a share, which was 3 cents ahead of the consensus analyst estimate. Revenue grew 9.4% from the previous year to $242.5 million, and was also $1.7 million higher than expected.

Additionally, management offered fiscal 2008 (ending September) profit guidance of $1.17 to $1.27 a share, ahead of the previous consensus estimate of $1.16.

But despite Wednesday's gains, Parametric shares remain 17% off their December highs. With that in mind, I'm here to answer readers' questions: Should you buy it? Can Parametric continue to build on its earnings momentum in the new year, or will the stock trade back down toward the low teens?

The company's design software, like its flagship Pro/Engineer 3D suite is a nondiscretionary purchase for its customers. While Parametric has noted that some customers are beginning to drag their feet when it comes to making large deals in North America, management said on the conference call that it sees no slowdown in end-market demand, and that sales should continue to grow faster than the industry.

Besides, the company generates just 34% of its total revenue in North America, compared with 42% in Europe and 24% in Asia. Parametric also has strong sales visibility, as some 72% of its total revenue is for services, consisting most of contracted, recurring maintenance costs.

Parametric's operating margin improved 330 basis points year over year to 18%, and management is targeting 22% margins by the end of fiscal 2008. This will require cost-cutting efforts, including synergies from the company's $250 million December purchase of German-based CoCreate Software.

At current levels, the company is trading at just 12.9 times the midpoint of management's guidance for full-year earnings. That represents a 29% discount to Parametric's historical average valuation over the past decade, as well as the 21% earnings growth the company is targeting for 2008. It's also 12% below the average valuation of the benchmark S&P 500 index.

I believe that Parametric will continue to deliver solid growth over the next couple of quarters and ultimately deliver on its operating margin goals. With that in mind, I believe the stock remains attractive to purchase at current levels; Parametric could ultimately trade up toward $20, while it closes the current valuation gap.

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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