Can Software Stocks Be Safe Harbors?

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

What comes to your mind when you think of business software companies? I'd be willing to bet it isn't "blue chip-level safety." Everybody knows that software is flighty and that today's big fads tend to be tomorrow's faded memories as technology continually proves Moore's Law again and again. However, business technology may have an edge.

Businesses tend to be a bit more into stability than consumers are. While a lot of consumers adore the latest and greatest (or really just the latest), company presidents know that when they get new software they may have to invest a ton of money and time to train both their IT staff on how to service it and everyone else in their company on how to use it. This means that a major software investment can provide a few years of stability and the start of a long relationship. So there might be something to owning these kinds of companies. Let's look at a few that have some good numbers and see how they stack up.

A Little More Profit and It'd Be Awesome

Convergys (NYSE: CVG) works primarily with larger companies, which I like. I appreciate when a company that's under the $2 billion market cap level is confident enough to pay a dividend, even if it is in the "savings account" range, because it shows that Convergys has a solid command of its cash flow. While I'm not really keen on the 5.3% profit margins because I usually see at least 10% as a solid indicator of being able to weather most storms, I might be tempted to let that slide because Convergys is trading at what I see as being a decent set of multiples. With a 15.54 P/E in this market and 1.3 times book value, Convergys has some serious potential deal value when you consider that it works with government, utilities, telecom, the financial sector and just about everyone else worth dealing with. From the look of it, I'd say Convergys is a fairly solidly-niched company that gives the big boys what they need to keep working.

Not Afraid of Obamacare

Ebix (NASDAQ: EBIX) provides outsourcing solutions to insurance from relationship management and quantification all the way to certification and translation services for agents and insurers. I am a little hesitant because Ebix's $613 mil market cap is just barely at the level I'll consider for a company I look at (at least for the Fools' consideration), but the company is confident enough to pay a 1.2% dividend and has recently jacked it up by 50%. Between doing the opposite of the expected hunkering down that one would expect in the shadow of Obamacare coming soon and the company's 36.5% profit margins, I'd have to say that Ebix has my vote as a pretty safe harbor investment. Ironically, since the market isn't in agreement with me I'd say that Ebix might even have some solid growth prospects once people realize that trading at 9.35 times earnings and 1.7 times book value is a bit cheap for this solid outsourcer. Not bad, I'd say.

Quality Ain't Cheap

Automatic Data Processing (NASDAQ: ADP) is a pretty solid customer overall. While I don't like that it's going head to head with Paychex, I do like that ADP has been winning award after award since the turn of the century. It also made a pretty shrewd acquisition of BZ Results in 2006 to shore up ADP's automotive dealer services offering. I also like the company's size at an almost $28 billion market cap and its 3% dividend yield and I'm cool with the 12.9% profit margins. Of course, the market is well aware of ADP's goodness, as it's trading at what I see as a pretty high 4.4 times book value and a slightly pricey 20.33 times earnings.

... Except When it Is

Amdocs Limited (NYSE: DOX) is a rare bird. I like that Amdocs allowed me to learn about an island I hadn't previously heard of (its home office is on an island called Guernsey) and that it operates with the biggest telecom companies in over 50 countries. That sounds pretty solid to me. I like the 12.1% profit margins because that should be more than enough to endure the minimal fluctuations one is likely to encounter when one's primary clients are the likes of AT&T and Sprint (amongst a lot of others). I also kind of like that Amdocs is only trading at 14.85 times earnings and 1.8 times its book value. While I don't generally like calling tech support, I've had a generally good experience when my AT&T Internet has gone down and I'm starting to wonder if Amdocs is only not doing well because of the Crappy Tech Rule.

The Crappy Tech Rule states that the crappier a tech company's service is the better it does in the market. Consider how much AOL grew when you could barely escape those irritating busy signals, or how Blackboard launched itself despite being a shoddy and barely usable piece of garbage. If the market notices how well Amdocs is actually doing, I see it growing well even in spite of the Crappy Tech Rule.

Conclusion: Yes!

Yes, it is possible to find a safe harbor in the software services sector. I figured this would be a tear-down article but I am once again happily mistaken. I've noticed that I usually find what I'm looking for, but sometimes I find just a little bit more. Remember to do your own research and let me know if I missed something important.


pongun has no positions in the stocks mentioned above. The Motley Fool owns shares of Ebix. Motley Fool newsletter services recommend Automatic Data Processing 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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