Kraft Foods is an under-performing,
asset-rich consumer staples company trading at approximately 10.5x FY2011 EPS
of $3.00 to $3.50 per share. After being acquired by Philip Morris in 1988 for
$12 billion, KFT was carved out in June 2001 and subsequently spun off in its
entirety to shareholders in April 2007; it is the largest spin-off in US
history and a member of the S&P 100 and S&P 500 ind... Show More
Systems is the largest independent high-end data warehousing software / hardware
provider for large companies. The company was founded in 1979 and gained
prominence after signing up industry leader Wells Fargo in 1983. Teradra was
sold to NCR in 1991 and subsequently spun off to NCR shareholders at the top of
the market in September 2007 to avoid a large tax bill at the NCR corporate
the spin off, the stock has lost approximately half of its value, declining
from the high 20s which were reached on takeover rumors to as low as $11 per
share at the November 2008 market bottom. Teradata has no debt, substantial
free cash flow, a promising niche position in a secular growth business, and a
solid recurring revenue stream from well-capitalized customers that gives the
business staying power through this great recession. Nonetheless, Teradata has
fallen victim to the relentless selling of hedge funds, negative investors,
economic weakness, etc.
of November 2008, management has guided Teradata to earn $1.35 in FY2008,
giving the Company a valuation of 10.5x EPS, which approximates the multiple of
the S&P 500. At its best, Teradata was projected to earn $1.50 by the
sell-side. The 10% decline in earnings is clearly disappointing. But relative
to other companies and the enormous decline in P/E from 20x at the peak to
10.5x a lower earnings number, Teradata offers a compelling risk-reward.
competes primarily with IBM, Microsoft, and Oracle. However, its competitive
advantage comes from the strength of its product offering.Field checks indicate that Teradata’s
customers believe the product is fantastic. For example, the retention rate is
98% annually and Teradata boasts industry leading clients including Coca-Cola.
FedEx, Wells Fargo, Mizuho Bank, Metro AG, and many others. All in all,
Teradata has over 850 customers globally with over 50% of the revenue from
outside of the United States.
Teradata has clients as diverse as the US Air Force to the Shanghai Stock
business has huge barriers to entry. Massive scale is required for profitability
as it took Teradata over 20 years from its 1979 inception to generate even
mediocre margins. Customers are reluctant to switch because of high switching
costs. Teradata sells a system to a customer for approximately $1.5 million
upfront and then charges recurring fees on an annual basis according to
capacity needs. Approximately 85% of revenue is recurring.
business is 1/3 software, 1/3 hardware, and 1/3 services. The current margins
are in the low 20s but have the potential to expand into the mid 20s over time,
according to management.
believes that its software / hardware makes category killers more powerful.
This reputation is shared by many industry experts and comes partially from its
long-standing relationship with Wal-Mart. Apparently, there was much confusion
over the Wal-Mart relationship which made investors nervous. When former NCR
CEO Mark Hurd left NCR to join H-P, he recruited former Wal-Msrt CIO Randall
Mott to run data warehousing. Due to Mott’s contacts, Wal-Mart decided to give
some of its new business to Hewlett-Packard. However, Teradata denies that
Wal-Mart terminated its existing agreement and explains that the cost of
switching Wal-Mart’s account would be astronomical not to mention enormously complex.
the business is not concentrated with no customer exceeding 5% of revenues and
the top 10 customers accounting for only 16% of revenues.
to the economy, Teradata will probably
earn about $1.10 in FY2009, which is 20% below FY2008 numbers based on a
27% tax rate. Sales should be flat due to declining domestic revenue offset by
growth overseas. This implies an attractive valuation of 13x trough earnings.
a full-cycle, management estimates that to-line growth could reach 7% to 9% due
to secular growth in the industry and increased market share. EPS growth could
reach 15%+ due to the fixed cost nature of the business.
This warrants a P/E multiple at least in the mid teens and more likely around 20x in a low-interest rate, normal environment.
has a good chance of being acquired in the foreseeable future. The CFO Stephen
Scheppman used to be at Per-Se Technologies before it was sold to McKesson in
2006, so he is very experienced in this arena.
also benefits from a fairly attractive M&A market in technology. Many
cash-rich technology firms such as IBM, Microsoft, and Oracle, have the
wherewithal to finance a takeover of Teradata and gain access to a lucrative
customer base and solid revenue stream without relying on the capital markets.
2007, IBM and Oracle acquired companies in the space for 4.2x and 4.4x training
sales. At this valuation, Teradata would be worth over $50 per share,
representing upside of over 400%. Obviously, this is aggressive.
even at a 2.0x multiple of sales, TDC could fetch a takeout price of $30.00 per
share which offers very solid upside.
1) Sale to larger competitor.
2) Better economy
3) Increased sell-side coverage and awareness as a public economy