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:

1698_PRGS.gif

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

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  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 >>
COMPANIES IN THIS ARTICLE
Trading Center