BMC Software (BMC) reported revenue of $491 million and pro forma earnings of 65 cents a share in its fiscal fourth quarter (Technology Research Group estimates -- revenue of $506 million, EPS of 69 cents).

As is typically the case, quality was lacking on both the top and bottom lines. Revenue growth was weak at 2.5% in the fourth quarter and 2.1% for the year. This is especially troubling given BMC's ongoing acquisition strategy and elevated goodwill balance (37% of assets).

Removing a tax credit and normalizing research and development expenses would drag earnings down to 47 cents a share in sustainable operating terms (this willlikely fall further when reserve utilization and capitalized expenses are taken into account).

A less-than-optimal correlation between cash flow, up 9.5% for the year, and net Income, up 74%, further limits earnings quality.

Companies with good profit and loss quality typically report cash flow two to three times greater than net income. Cash flow for fiscal 2010 was only 56% above earnings, thus making percentage comparisons between the two meaningful. An unhealthy variance between pro forma and fully expensed, or GAAP, estimates and recurring use of cost containment measures aggravates matters.

Consensus GAAP expectations are 23% below pro forma for fiscal 2011 and 17% for fiscal 2012.

BMC shares were down 6% year to date and valued at 19 times trailing GAAP earnings. CA ( CA), a provider of IT management software, trades at 15 times.

Both companies have operational and earnings management concerns and should carry similar appraisals. For this to occur, BMC's valuation would need a haircut.

These latest results come as no surprise. What is shocking is a relatively muted reaction from investors -- shares were down 2.7% in trading Thursday. Also hard to figure is a persistent lack of short interest, which currently stands at roughly 2% of the float. How BMC continues to defy gravity is a head-scratcher. Perhaps an acquisition premium is being priced in.

We reiterate a sell rating and revised price objective of $32 vs. $34previously. Our target multiple goes to 12 times fiscal 2011 EPS from 13 times.