Only a couple weeks into earnings season and we have already seen some big winners and losers in the tech arena. In most cases, betting on whether a company will beat or miss has been a crapshoot, with unpredictable outcomes in EPS. Alphabet Inc (GOOGL) and Netflix, Inc. (NFLX) are recent examples where investors have been disappointed, after missed expectations have caused big gaps lower in the stocks.
However, there has been a consistent area in tech that has been seeing a beat in both top and bottom lines and gaps higher in stock price. Recent earnings from VMware, Inc. (VMW), F5 Networks, Inc. (FFIV), Citrix Systems, Inc. (CTXS) and Manhattan Associates, Inc. (MANH) are examples of what some of the internet software and cloud names are doing after earnings. More specifically, business and application software is a segment of technology that is standing out above the rest.
While there are many of these companies out there, I wanted to focus on top ranked business and application software companies showing strong earnings momentum and healthy price action. The stocks listed below have a Zack Rank #1 or #2 and have recently had strong earnings, or anticipate an EPS beat in the near future.
Computer Software Stocks with Outstanding Earnings Momentum: Manhattan Associates, Inc. (MANH)
Manhattan Associates, Inc. (MANH) is a Zacks Rank #1 that is a developer and provider of supply chain commerce solutions. The company is engaged in selling, deploying, servicing and maintaining software solutions to manage supply chains for its customers. Manhattan’s solutions enhance distribution efficiencies through the integration of supply chain constituents, including manufacturers, distributors, retailers, suppliers, transportation providers and end consumers.
Manhattan has a market cap of almost $5 billion and a forward PE of 41. The high valuation is an issue for some investors and this is why it has a Zacks Style Score of “F” in Value. However, the stock sports a Style Score of “A” in Growth and Momentum, as many investors believe that the high valuation is justified by growth in the business.
The investors focused on growth were recently rewarded after Manhattan reported a Q1 EPS of 42 cents per share verse the 39 cents per share expected. While the EPS beat was nice, guidance was very impressive as the company raised fiscal year 2016 to $1.69-$1.72 verse the $1.67 expected.
Investors responded positively as the stock jumped over 15% and held onto most of its gains. Looking at the chart below, we see that the surprise beat probably should have been expected, as the company hasn’t missed on EPS in the last 4 years. The stock seems like it still has room to run and is likely to see 2015 highs some point this year.
Computer Software Stocks with Outstanding Earnings Momentum: Citrix Systems, Inc. (CTXS)
Citrix Systems, Inc. (CTXS) is a Zacks Rank #2 that is one of the leading suppliers of application delivery and management software and services that enable the effective and efficient enterprise-wide deployment and management of applications. The company’s solutions offer secure, mobile workspaces that provide people with access to apps, desktops, data and communications on any device, over any network or cloud. The Ft. Lauderdale based company operates in two segments: Enterprise and Service Provider division and the Mobility Apps division.
Citrix has a market cap of $12.75 billion and a forward PE of 21. The stock sports a Style Score of “A” in Growth and Momentum with and expected 3-5 year EPS growth rate of 14.37%.
Q1 earnings came in last week at $1.18 cents per share verse the 93 cents per share expected and revenues were reported at $826 million verse the $787 million expected. The company also guided Q2 above expectations and raised their fiscal year outlook to $4.90-$5.00 verse the $4.72 expected.
The stock jumped over 10% after the release before pulling back to the $83 level on Friday. Brokerages rushed to raise price targets, including Cowen who raise it from $85 to $92, while reiterating their ‘Outperform’ rating.
Like Manhattan, Citrix has shown an amazing ability to perform every quarter. This pullback after earnings could provide investors with a great opportunity to buy, before the sock breaks 2012 highs and heads towards its tech bubble high of $122.31
Computer Software Stocks with Outstanding Earnings Momentum: DST Systems, Inc. (DST)
DST Systems, Inc. (DST) is a Zacks Rank #1 that provides sophisticated information processing and computer software services and products that help clients improve productivity, increase efficiencies, and provide higher levels of customer service. DST is organized domestically and internationally into three operating segments: Financial Services, Output Solutions, and Customer Management. The Kansas City based company operates one of the most advanced data centers in the world, which provides information-processing services to support the products within each operating segment.
DST has a market cap of $4 billion and a forward PE of 18. The company sports a Zacks Style Score of “C” in Value, “B” in Momentum and pays a dividend just over 1%.
In 2015, the stock hit all-time highs at $13.65 per share before pulling back below the $100 level multiple times. Last week the company reported Q1 earnings that beat both the top and bottom line causing the stock to jump almost 5% over the next couple days. Sitting at the $120 area now, the stock looks to continue its momentum over the last couple years and get back to 2015 highs.
CEO Stephen Hooley went into detail on the quarter: “We are pleased with our first quarter operating results particularly in our Healthcare business which delivered double digit growth over prior year. We have also achieved revenue growth in our Financial Services segment as the benefits of our recent acquisitions are coming through in this quarter’s results and we continue to generate margin expansion in our Customer Communications business. We continue to deliver in line with our overall strategic plan. This includes a focus on growing revenue through organic opportunities and targeted acquisitions, and making investments in our businesses to prepare and position DST for the future.”
Computer Software Stocks with Outstanding Earnings Momentum: Nuance Communications Inc (NUAN)
Nuance Communications Inc (NUAN) is a Zacks Rank #1 that provides voice and language solutions for businesses and consumers worldwide. The Burlington, Massachusetts based company operates through four segments: Healthcare, Mobile and Consumer, Enterprise, and Imaging. Its technologies, applications and services make the user experience more compelling by transforming the way people interact with information and how they create, share and use documents.
Nuance has a market cap of $5.5 billion and a forward PE of 19. The stock sports Zacks Style Scores of “B” in Momentum and “B” in Growth. The company’s expected 3-5 year EPS growth rate in 14.50% and will report earnings on May 10th.
If Nuance follows the sector trend, the stock should surprise higher on EPS for the seventh consecutive quarter. If they can show a substantial beat, the momentum the stock has had over the last year should send shares to multi year highs.
Computer Software Stocks with Outstanding Earnings Momentum: Open Text Corporation (USA) (OTEX)
Open Text Corporation (USA) (OTEX) is a Zacks Rank #1 that provides a suite of software products and services that assist organizations in finding, utilizing, and sharing business information from various devices. The Canadian based company allows individuals, teams, organizations, and global trading communities to collaborate on projects, share ideas and accelerate innovation to the fastest possible speed.
Open Text has a market cap of almost $6.7 billion and a forward PE of 16. The company sports weak Style Scores of “D” in both Growth and Value and Momentum, but pays investors a 1.4% dividend.
The company reports on April 27th where it will go for its fourth EPS beat in as many quarters. If the stock follows the EPS trend, a big EPS surprise to the upside could bring the stock back to all-time highs. If the bullish scenario plays out a short squeeze could lead to a surge in price, as the stock has a short interest ratio (days to cover) of 13.7.
Computer Software Stocks With Momentum Summary
Sometimes investing can be easy if you just stick with what’s working. Computer software companies that continue to exceed earnings expectations will continue to see higher stock prices. Investors that want exposure to tech and this earnings power need to focus some of their portfolio on software application companies. The growth in this area remains as businesses and individuals continue their desire to become more efficient.
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