Goldman Sachs on Friday upgraded CA shares to a “buy” recommendation and added the company’s stock to its “Americas Conviction Buy List,” a short and prestigious list of companies it considers to be the cream of Wall Street’s crop.
While CA shares only closed up 91 cents, or 4 percent, to $26.89 a share, the endorsement from one of Wall Street’s most respected investment banking and research firms illustrates just how far the management software company has come in the past three years.
In November 2004, CA’s board of directors hired John Swainson, a 26-year IBM veteran, to turn the company around after a notorious accounting scandal spanning more than five years culminated with former CEO Sanjay Kumar’s conviction for securities fraud.
The restatement of years’ worth of financial reports and a major restructuring program caused investors to lose faith, sending what was one of the industry’s most prolific stocks into a precipitous tailspin.
But it was this humbling fall from grace that actually revitalized CA, analysts said, forcing the company to repair its reputation not only with investors but with long-time customers who had grown tired of CA’s institutional arrogance and inattention to detail.
“They’ve done a much better job in the past few years dealing with their customers,” Fred Broussard, an analyst at IDC, said in an interview with InternetNews.com. “Quite frankly, all the financial problems didn’t matter that much to most customers. But the change that it brought under Swainson definitely made CA work on improving its relationships with both its customers and partners.”
The attitude adjustment, combined with a better-integrated suite of software products and an increased emphasis on developing software in-house is paying off.
In November, this kinder, gentler and smarter CA skipped past analyst estimates in its second quarter and raised its sales and earnings guidance for the full fiscal year. Excluding charges related to employee-stock options and other expenses, the Islandia, N.Y.-based company earned 32 cents a share on sales of slightly more than $1 billion.
“These results mark a significant milestone in CA’s transformation,” CEO Swainson said during a conference call with analysts following the November 1 earnings report. “While there’s more work to be done, this quarter’s results show our restructuring efforts and focus on execution have begun to show clear benefits to both the top and bottom line.”
It was CA’s newfound agility and transparency that convinced Goldman Sachs analyst Sarah Friar to upgrade the stock and include it with the likes of Oracle, Intel and Research In Motion on the firm’s list of best investment ideas.
“We are upgrading CA to buy from neutral given our increased conviction in CA’s operational improvements, business momentum and potential for significant margin upside,” Friar wrote in her research note. “We expect CA’s upcoming Analyst Day on December 17 to be a positive catalyst for the shares. This is the first Analyst Day for CA in years…we believe that more light shed on the model and senior management will bring more buyers to the shares.”
The key to future growth
Swainson said CA’s Enterprise IT Management (EITM) portfolio of software, hardware and services will be the key to the company’s growth for the foreseeable future. So far, the early results are encouraging. In its latest quarter, CA reported a 46 percent increase in total bookings from the year-ago quarter to more than $1 billion. It also secured 16 separate contract renewals worth than $10 million each in the quarter.
During its incredible growth in the late-1990s and into the new millennium, CA earned an unflattering reputation as a company that loved to acquire companies but then did a lousy job of integrating the newly acquired assets with its existing portfolio. Beta-testing tended to be rushed and incomplete. And CA was considered expensive compared to competitors like IBM, BMC Software and EMC.
“In the end, customers only care about if the products work and do they get the job done,” Broussard said. “As long as they can do that, even during the worst of financial difficulties, customers will stick with you.”
CA’s Chief Financial Officer Nancy Cooper last month told analysts to revise their models and raised the company’s sales forecast for the full fiscal year to between $4.15 billion and $4.2 billion, up from its previous target of between $4.05 billion and $4.1 billion. She also bumped up earnings estimates to between $1.06 and $1.10 a share for the year, up from the prior range of 94 cents to $1 a share.
Along with the revised outlook, CA said it will detail a new set of datacenter automation products—codenamed McKinley—in mid-December.
“We’re turning into a more efficient and agile organization,” Swainson said.
