Buy or Sell After This Management Shakeup?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As a value investor, I often search for the large price swings in the stock market to find investment opportunities. A significant drop in a company's stock price happens when the company experiences missteps, bad earnings results, or key executive shakeups. The market may react right away in different magnitudes. It can underreact or overreact, but most of the time I think the market overreacts to any given news, and that creates buying opportunities. However, investors need to look deeper into each circumstance to choose the right opportunities for their portfolios.

What happened?

MicroStrategy (NASDAQ: MSTR) just recently released a management restructuring, with a series of replacements. By the recommendation of Michael Saylor, the company’s chairman and CEO, Sanju Bansal, would no longer be the company’s COO, and is being replaced by Bob Watts, the VP for Worldwide Professional Services. VP Peng Xiao takes a new role as Chief Technology Officer, replacing Jeffery Bedell. And the CEO steps down from the president’s role while promoting two new presidents, Johnathan Klein, the chief legal officer and Paul Zolfaghari, former COO at startup ParAccel. After the announcement, MicroStrategy dived as much as 9.5%, and closed the day with a nearly 7% loss of its market capitalization.

With that news, BMO Capital cut its rating for the company, from Outperform to Market Perform. Analyst Keirstead said that the COO change was in fact a big deal, not just incremental change. Ex-COO Bansal has been in that position for 19 years and considered to be the right hand man for founder Michael Saylor. So the change must be quite influencing.

The business MicroStragey involves in is business intelligence in enterprise software platforms. In 2011, the company has several well-known customer deals such as Groupon, LinkedIn, and Pacific Sunwear. Last month, the company announced that Chipotle Mexican Grill has chosen MicroStrategy to provide its enterprise BI solutions to around 1,250 stores in the US. The good thing is that the company does not have customers’ concentration risks, as no individual customer currently accounts for 10% or more of total sales.

Financials

Historically, MicroStrategy is the story of double-digit returns on invested capital. Since 2004, it has always reported profits annually. The trailing twelve month return on invested capital is nearly 12.8%. In addition, it has quite liquid balance sheet. It is a debt light company, with $196 million cash and $179 million stockholders’ equity. The main item in its liabilities is deferred revenues, of $106 million as of June 2012. The low shareholders’ equity is due to increasingly high amount of treasury stocks. It means that the company has been buying back shares since 2007, which was booked at $475 million as of June 2012.

Insider trading

However, the insiders do not seem to be bullish with the company at this time. For the last two months, its Chairman and CEO has exercised options at nearly $20.70 per share and sold the shares at the market price, in the range of $124-$129 per share. The total transaction value for the last two months is more than $36.6 million.

Industry peers

In the BI solution industry, MicroStrategy has to compete with several big guys such as IBM (NYSE: IBM), Oracle (NYSE: ORCL) and SAP (NYSE: SAP). MicroStrategy is the smallest among the four companies. It has the market capitalization of only $1.22 billion whereas IBM’s is $216 billion, Oracle’s is $147.4 billion and SAP’s is $83 billion.

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>MSTR</strong></p> </td> <td> <p><strong>ORCL</strong></p> </td> <td> <p><strong>IBM</strong></p> </td> <td> <p><strong>SAP</strong></p> </td> </tr> <tr> <td> <p><strong>Operating margin</strong></p> </td> <td> <p>3.47</p> </td> <td> <p>36.92</p> </td> <td> <p>19.36</p> </td> <td> <p>29.13</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>12.79</p> </td> <td> <p>27.73</p> </td> <td> <p>80.47</p> </td> <td> <p>27.56</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0</p> </td> <td> <p>31</p> </td> <td> <p>113</p> </td> <td> <p>0</p> </td> </tr> <tr> <td> <p><strong>Dividend yield</strong></p> </td> <td> <p>0</p> </td> <td> <p>0.8</p> </td> <td> <p>1.8</p> </td> <td> <p>1</p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>57.8</p> </td> <td> <p>15.2</p> </td> <td> <p>13.9</p> </td> <td> <p>18</p> </td> </tr> <tr> <td> <p><strong>P/B</strong></p> </td> <td> <p>6.8</p> </td> <td> <p>3.4</p> </td> <td> <p>10.7</p> </td> <td> <p>5</p> </td> </tr> </tbody> </table>

We can clearly see that MicroStrategy under-performs the other three bigger peers. Even though it has a double-digit return on equity for the trailing twelve months, it is just half of Oracle’s and SAP’s. IBM has the highest return on equity, however, its 80.5% ROE is due to high leverage level, of 1.13. But I think IBM is still company of choice among the four as it pays the highest dividend yields, has a reasonable margin, and a cheapest valuation of 13.9x P/E. MicroStrategy is the most expensive with 57.8x P/E whereas the operating margin is quite low. 

My Foolish Take

Personally, I would not consider MicroStrategy for my portfolio now because of the following:

  • Lowest operating margin and return on equity compared to its peers
  • No dividend payment
  • Rich valuation of 57.8x P/E
  • Current management shakeup
  • Huge insider selling

 


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Chipotle Mexican Grill, International Business Machines, LinkedIn, and Oracle. Motley Fool newsletter services recommend Chipotle Mexican Grill, International Business Machines, LinkedIn, and Pacific Sunwear. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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