Progress Software -- Long-Term Value Stems From Recent Acquisitions

NEW YORK (TheStreet) – The aphorism innovate or die can serve as a rallying cry for companies. But companies can also introduce new products through their mergers and acquisitions

The latter course has been a working strategy for Progress Software  (PRGS), which is due to report fiscal second-quarter earnings results Thursday after close.

Although Progress shares have traded flat over the past three months and are up just 5% on the year, against more than 11% gains for the iShares North American Tech-Software ETF (IGV), these shares look attractive, given the company's track record of doing deals that grow revenue and profits. 

So, while Progress stock isn't cheap today at 38 times earnings, compared to a P/E of 21 for the S&P 500 (SPX), that doesn't mean shares can't head higher, especially with clear signs that Progress will be able to deliver market-beating numbers in the quarters and years ahead. 

The Bedford, Mass.-based company specializes in real-time data management software. Whether on corporate networks or on remote cloud sites, Progress wants to simplify how business software is created and used. Its software simplifies complex tasks and allows software developers to build programs that work on any platform or device.

The company has reversed plummeting sales, which fell .44% in 2014, to where full-year 2015 projections suggest better than 26% year-over-year growth.

The secret to Progress' quick turnaround lies in its acquisitions, which are already paying off.

In the fourth quarter of fiscal year 2014, for instance, the company bought Georgia-based BravePoint, a company that helps businesses grow their profits through the use of technology. BravePoint's expertise in training and application development services has augmented Progress' product portfolio, which already included business integration services.

At the end of the fourth quarter, Progress completed a $262.5 million acquisition of Telerik, a privately held company that specializes in software development tools. Telerik, which has over one million developers in its community, turned Progress into an instant research and development hub with access to new applications that can work across multiple platforms.

One of Progress' objectives at its earnings call will be to demonstrate how these deals will lead to higher profitability. A sure-footed, confident outlook should instill confidence in investors and send the stock price higher. 

For the quarter ended May, the average earning estimate is 31 cents a share, down from 36 cents, while revenue is projected to be up 22% year over year to $99 million. For the full year, ending November, earnings of $1.42 per share will be down 6% year over year, while full-year revenue is expected to climb almost 26% to $420 million.

But this fiscal year is about growing sales.

Assuming Progress does meet its share target for 2015, this means earnings should grow more than 6%, based on 2016 projections of $1.50 a share. This puts Progress forward P/E at 18, which is in line with the S&P 500, suggesting Progress stock is worth holding until meaningful signs of slowing growth emerge.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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