Are These Business Software Companies a Good Deal?

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

As every Fool knows, a great company is a sweet thing to own (and not possessed of all the calories from the holiday season). But having a great company in your portfolio isn't enough -- it also has to be a great deal when you buy it to make the purchase worthwhile. I'd compare it to your ride in that even though your wheels might be amazing, if they cost you ten years' pay the tradeoff just isn't worth it. So let's check out a few business software companies that the market may not have caught onto yet and see if we can find some sweet deals.

Good Deals

Ebix (NASDAQ: EBIX) helps insurance companies from the individual agent level to the multinational level in everything from administrative help to customer service and issue resolution, but is it a good deal? Actually, I think it is but it could be better. I have a lot of respect for any company that can pull 36.5% profit margins, particularly in a business arena where it's easy for the outsourcee to themselves be outsourced. I also like companies that trade for less than 10 times their earnings (Ebix is at 9.35 as I write this) and for under 2 times book value (1.7 as I write this). So overall this is a small cap company you might be wise to take a second look at.

Amdocs Limited (NYSE: DOX) is also a pretty decent deal. While its 12.1% profit margins and 14.85 P/E ratio don't compare too favorably to Ebix's stats, Ebix works more like a consultancy in the insurance industry while Amdocs is more focused on a smaller group of huge companies in the telecommunications sector. Amdocs is also almost 10 times as large at Ebix from a market capitalization perspective. So for the amount of operations each company performs and what they actually do, I'd say both are doing pretty well and trading pretty fairly.

A Little Iffy

Don't get me wrong, I love quantification and keeping track of what your customers want and enjoy. But I seriously think Convergys (NYSE: CVG) could be doing a better job of this. While most companies with market caps under $2 billion have to scrap a little to keep their market share, this is a company that markets to everyone and focuses on the big boys. I'm not really keen on Convergys's 5.3% profit margins because that just doesn't seem safe if a competitor comes along and starts grabbing up market share. I also think that trading at more than 15 times earnings is starting to get a little expensive. Yeah yeah yeah, the market's trading at this or that. Do you want to go with the herd or do you want to go one better than the next guy? I expect a great deal to be awesome -- I want the stock equivalent of extreme couponing. I want to grab a share for a nickel and vote for the company to close and give me $100 in equity. But until I find that, I will admit that Convergys is doing reasonably well considering its infrastructure requirements. At 1.3 times book value, it's one of the best I've seen in this entire industry. So it's not bad -- it's just not as good as the two beauties above.

A Pretty Bad Deal at the Moment

Blackbaud (NASDAQ: BLKB) is all about helping not-for-profit companies get the world interested in donating to them and keeping those donations organized systematically. But is it doing so well enough to justify its share price? On the whole, I'd have to say no on this opportunity for three pretty good reasons:

1. Blackbaud simply isn't large enough to only be pulling a 2.3% profit margin. If it were a huge company with tons of machinery that might be acceptable, but it's still a relatively lean crew at only a smidge over $1 billion in market capitalization. 

2. Trading at 108.91 times earnings would make me slam on the brakes under almost any circumstances. There might be an issue with my stock screener, but if there isn't then this should be reason enough for you to avoid Blackbaud for the time being.

3. Unless your company is headquartered in a cave and you have no intellectual property whatsoever you shouldn't be trading for 6.8 times your book value. And yet Blackbaud is doing so despite having a fairly substantial investment in proprietary software under its hood. Can you explain that? I can't, and I don't care enough to try.

A Good Company Isn't Always a Good Deal

I've caught some flak for trash talking companies before so I try to be fair. The above all have their strong points like heavy market saturation and the fact that they deal with powerful and sturdy companies and are thus more stable by association. But just being a good company isn't enough to make having shares a good idea because sometimes they're just too pricey. Have patience and keep your cash until you find a great company for a great price. It's just like brown bagging your lunch four days a week so you can have a really great meal on Friday instead of just getting a boring burger every day.

pongun has no positions in the stocks mentioned above. The Motley Fool owns shares of Ebix. Motley Fool newsletter services recommend Blackbaud and Ebix. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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