The Reasons Behind Teradata's (TDC) Tumble on Wednesday

NEW YORK (TheStreet) -- A mere six weeks after downgrading Teradata (TDC) to equal weight, Morgan Stanley has grown even more bearish. The investment firm cut its rating of the big data tech company to "underweight" with a price target of $36.

"Growth slowed in 2013 and is unlikely to [re-accelerate] in the foreseeable future due to cyclical and secular headwinds," it wrote.

The bank sees potential challenges ahead as cheaper cloud services muscle into the data storage space, and as deals with larger corporate customers lead to inconsistent and delayed returns. Increased competition will also lead to growth and pricing margin pressure and Morgan Stanley doubts the company has enough traction in the mid-market to survive the threat.

"With the exception of Teradata's Aster Data and Hadoop business, which makes up $30 million, or 1% of revenue, the majority of revenue is at risk to customers looking for cheaper alternatives, which is likely to limit [Enterprise Data Warehouse] (EDW) growth," the bank said.

In October, the Dayton, Ohio-based business forecast full-year net income between $2.70 and $2.80 a share, well below previous consensus from Thomson Reuters of $3.05 a share.

Shares have tumbled 6.3% during Wednesday trading to $42.50. Year to date, the stock has fallen 31.3%.

TheStreet Ratings team rates Teradata Corp as a Hold with a ratings score of C+. The team has this to say about its recommendation:

"We rate Teradata Corp (TDC) a HOLD. The primary factors that have impacted our rating are mixed -- some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures and reasonable valuation levels. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, weak operating cash flow and deteriorating net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 22.6%. Since the same quarter one year prior, revenues slightly increased by 2.9%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • TDC's debt-to-equity ratio is very low at 0.13 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, TDC has a quick ratio of 1.95, which demonstrates the ability of the company to cover short-term liquidity needs.
  • The gross profit margin for Teradata Corp is rather high; currently it is at 59.61%. Regardless of TDC's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 14.71% trails the industry average.
  • Net operating cash flow has decreased to $64 million or 40.18% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm's growth is significantly lower.
  • Looking at the price performance of TDC's shares over the past 12 months, there is not much good news to report: the stock is down 25.79%, and it has underformed the S&P 500 Index. In addition, the company's earnings per share are lower today than the year-earlier quarter. Although its share price is down sharply from a year ago, do not assume that it can now be tagged as cheap and attractive. The reality is that, based on its current price in relation to its earnings, TDC is still more expensive than most of the other companies in its industry.

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