Should You Buy It?: CA

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CA ( CA) is a beaten-up enterprise software producer that is starting to garner the attention of Wall Street.

The company was upgraded to outperform on Wednesday by the brokerage Cowen & Co. According to the analyst, at Wednesday's closing price of $20.12, the shares are merely valued at CA's order book of recurring contract revenue.

This follows a similar upgrade at JPMorgan in mid-September, again citing the approximately 70% of the company's total revenue that is generated by recurring software subscriptions and maintenance. Still, despite the recent upbeat sentiment from Wall Street, only seven of the 14 analysts who follow CA rate the stock a buy, while the other seven have neutral ratings.

With that in mind, I'm here to answer readers' questions. Should you buy it? Does CA offer value at current levels, or will pressure from the general economic slowdown affect the company's growth?

At current levels, the stock is down 19% year to date, largely keeping pace with the broader market averages. That values CA at just 13.4 times expected fiscal 2009 (ending March) earnings of $1.50 a share, compared with an average P/E ratio of 18.5 times expected full-year earnings for technology stocks, according to Bloomberg.

And CA's subscription revenue model does give the company better revenue visibility than its peers. In the fiscal first quarter, ended June, the company posted total bookings of $1.03 billion -- up 15% from the previous year.

Aided by cost-cutting, management was able to leverage this into 38% year-over-year earnings growth. For the fiscal 2009 overall, the current market expectation is for CA to deliver 26% profit growth, on top of 35% last year.

Even so, the company does face some potential headwinds that could weigh on its growth prospects. For one thing, CA generates about 35% of its total revenue overseas, and the company's near-term results could also be hurt by the recent rebound in the dollar.

For another, the threat of slower macroeconomic growth could mean that fewer customers could decide to renew their software contracts or upgrade to new products as quickly as they would otherwise. For example, about 35% to 40% of CA's total revenue comes from the financial services industry, which continues to be under serious pressure.

Looking at the company's balance sheet, CA has $2.41 billion of cash, but also $2.23 billion of total debt. This is a lot of debt compared with most technology companies that are flush with cash, and that limits management's ability to buy back stock or seek acquisitions.

With that in mind, I believe that readers should avoid CA shares at current levels. The company faces several potential headwinds in the coming quarters that could offset the increasing investor sentiment that the business model can deliver consistent growth.


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Above 10,000
9000-10,000
8000-9000
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David Peltier writes regularly about value stocksfor TheStreet.com. Get a free trial here.

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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