Tickers in this Article: CA, IBM, BMC, CRM, RHT, SFSF, ORCL
Looking only at cash flow, CA Technologies (NYSE:CA) should be a slam-dunk for value investors. The company produces a lot of cash flow, has a strong position in its core markets, and provides software that is critical enough to its customers' operations that switch-overs to competitors' products are not undertaken lightly.

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But then there is the growth problem. CA Technologies just is not growing that much, has not grown much in a long time, and serves a market (mainframes) that seems to be in inexorable decline. Given the relative scarcity of technology value investors, then, CA is a stock may well be much too cheap and yet could languish anyway.

A Fiscal Fourth Quarter that Was Not Strong
Sometimes companies report earnings that look bad at first and get better with further exploration. In other cases, the opposite is true. It looks like CA Technologies belongs in that second category.

The company missed the low end of the analyst range of revenue estimates and posted 4% constant currency growth, but only 2% organic growth. That is problematic, as there was little in recent reports from BMC Software (NYSE:BMC) or IBM (NYSE:IBM) to back up that sort of weakness. True, it's not a blistering growth market by any stretch, but the relative results here suggest CA may be losing some share.

The company did report that the backlog rose 6%, and the current backlog was up 5%, and stands at a level of nearly eight quarters' worth of revenue. Bookings growth was quite strong at 31%, but adjusting for a single large deal drops that growth rate to a mid-single-digit level.

Profitability was better, but not better enough. Operating income rose 29% from last year and the operating margin expanded by five full points, but analysts were generally expecting even better results. Moreover, while the company's revenue growth guidance of 6 to 8% is encouraging, the lower operating cash flow growth guidance of 3 to 5% is concerning.


Steady Doesn't Pay in Tech
Investors who normally avoid the volatility and uncertainty that is so common to tech may see the stability of the company's mainframe and distributed systems management software business as a plus. Unfortunately, that is not the way tech usually works.

The death of the mainframe has been predicted many times over, yet they are still in operation. That said, cloud and virtualization is all the rage these days. Value-oriented investors may be incredulous at the premiums that investors will pay to own the likes of Salesforce.com (NYSE:CRM), VMware (NYSE:VMW), Red Hat (NYSE:RHT), or SuccessFactors (Nasdaq:SFSF), but that's where the growth is. So long as the growth is hot, investors don't seem to care much about valuation. Consequently, even though new IBM mainframe products could help CA's revenue outlook, it won't be nearly enough to attract the hot money.

The Bottom Line
CA Technologies has two major risks today. First, dedicated rivals like BMC and more diversified companies like Hewlett-Packard (NYSE:HPQ) and Oracle (Nasdaq:ORCL) always offer the "better mousetrap" threat in that they can develop better products (or products with better cost-benefit tradeoffs) and gain share.

Second, there is the risk that the company will try to appease growth-seeking investors and do something stupid with the over $1.5 billion in net cash on the balance sheet. I do not underestimate the potential power of a transformative acquisition, but the track record across technology is not so good - big slow-growing tech companies that try to buy growth through acquisition usually just waste their money.

Even factoring in slower revenue growth and some free cash flow margin slippage, CA ends up looking like a value - undervalued by as much as 30% even assuming no more than 3% free cash flow growth. The problem is, it could take a long time for shareholders to see that value. For patient investors who can be content seeing value come in the form of dividends and gradual share price appreciation, CA is a good name to consider, but investors should realize that deep value does not always make for a great stock in technology.

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