Progress Software (Nasdaq: PRGS) beat expectations this week and was recognized with a price bump that caps a year-long recovery.

The recovery started earlier, as the company first solved its option backdating problems and, second, benefited from speculation that it should be on Oracle's well-capitalized acquisition radar.

In a valuation nutshell, the price now fully reflects robust fundamentals. A growing customer base shows up in growing cash flow, although the trailing price-to-earnings (P/E) ratio is high:


Against forward guidance, the valuation is rich but not exorbitant. At $30, the forward P/E is about 27x ($30 price divided by estimated $1.10 fully-diluted GAAP EPS). In the grow-or-perish software business, where mutiples must be higher as a function of reality, that's reasonable except that projected revenue growth rate is only 6% (i.e., to $475 million for fiscal 2007).

Still, Progress is a key player in a critical segment of the software sector. But alas it's got to be one of the toughest to understand. Application infrastructure is sufficiently complex (or boring) that most street commentary is reduced to groping the financials. But this company is a good example of the new face of investing and why it's not your grandfather's stock market anymore -- nine products that touch on just about all things software from mission-critical standards (i.e., XML and XQuery), relational databases, 4GL development tools and, most importantly of all, web-based service architectures.

The OpenEdge Platform
Their flagship product is the OpenEdge platform. This is a giant workbench with a killer set of tools. There are two main sorts of customers. First, a big company, with lots of loosely connected, far-flung applications can use OpenEdge to build master applications that tie together prexisting applications and attach new components. By using a fourth-generation language (4GL), developers can deploy and change products quickly because 4GL languages perform much of the heavy lifting. Much more so than 3GLs like C++ and Java, which require the help of serious code geeks.

(Note an interesting megatrend is underway -- programming languages become more user-friendly as they converge to graphical 5GLs. Yesterday, a business analyst maybe crunched numbers. Today, he/she is expected to know something about code development. Soon ordinary folks will build applications.)

The second sorts of customers are independent software vendors (ISVs) who use OpenEdge to build specialized software applications that serve "vertical markets" like casinos. In either case, most companies still have a quilt-patch of software distributed software assets, and so there will strong demand for "application integration." It's safe to predict a bull market for application coherence.

Service-Based Architecture
Maybe the best reason Progress matters is the importance of service-oriented architectures. Okay, this is a whole thing unto itself and a whole debate to go along. But basically, the idea is related to some of these mashup applications that you see on the internet. Google (Nasdaq: GOOG) maps is really popular; lost of developers have plugged into the Google Map database and used it as a component to build their own applications. They are using Goolge maps as a service provider. As if they outsourced application and database development to Google!

We haven't even started to see the realization of this service-based architectures. Seriously, there isn't a major software company that's not working on it. These will enable richer connections within companies and externally, to customers and vendors. And just as connecting cities requires infrastructures, so does data need paved roadways and rules for sharing. OpenEdge, for example, utilizes XQuery to process data that is stored in structed format (XML). So, in short, Progress builds software that helps companies develop tools that connect to data on the modern information infrastructure.

The Bottom Line
Progress Software presents a solid opportunity, but there is still fierce competition from the usual suspects -- Oracle (Nasdaq: ORCL) and IBM (NYSE: IBM). Also, BEA Systems (Nasdaq: BEAS). But especially don't underestimate Microsoft (Nasdaq: MSFT) and their SharePoint product line -- the value added resellers (VARs) and integrators seem to love this, and because they are in the trenches, they are very good forecasters.

Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!

Related Articles
  1. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  2. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  3. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  4. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  5. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  6. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  7. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  8. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  9. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  10. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!