This software company is buying out its competition, growing at double-digit rates, and beat estimates by five cents in the past quarter. Our second recommendation is a sell on a company whose shares are trending down.
Tyler Technologies (TYL)
From Cabot Stock of the Month
All of Tyler Technologies’ (TYL) customers are government offices. Numbering more than 13,000 local offices in all 50 U.S. states (as well as other English-speaking countries), Tyler provides software for programs, including tax appraisal services, community development, civil process, student transportation management, parks and recreations, public safety, and special education.
In May, the company acquired Brazos Technology, a provider of mobile hand-held solutions used by law enforcement to issue citations and report accidents. Indecipherable traffic tickets and accident reports are so 20th century! And on October 1, Tyler announced the acquisition of New World Systems of Troy, Michigan, for $360 million in cash and approximately 2.1 million shares of Tyler common stock. This deal will be immediately accretive to earnings, and will give Tyler a dominant presence in the realm of public safety, which is where 67% of New World’s revenues come from. In fact, New World was number one in the industry. So now Tyler is number one in public safety and number one in public sector software in general.
Tyler has grown earnings at least 20% in each of the last seven quarters, and analysts are projecting 35% growth in 2016. Cash flow growth is impressive at 36%, much higher than the 13.8% industry average. After-tax profit margins just hit 17.0%, the highest number in the past five years. And the company has no debt. But the P/E ratio is 69. That’s not only pretty close to its highest level in recent years, it’s also a number that will stop many fundamental investors cold. But remember the acquisitions, which will increase earnings at least 35% next year; the stock’s forward PE ratio is “just” 49. And remember the fact that the best growth companies typically sell for high multiples.
The big investors in Tyler see capable management that has the potential to grow the company several-fold as it consolidates its industry—and governments move slowly but steadily out of the pencil-and-paper era. And these investors are willing to pay up to own a part of it. As am I.
Last, but not least, let’s consider the chart. TYL has been in an uptrend for years, and a pretty steady one at that. The October 1 announcement sparked a wave of new buying that rocketed the stock up and out of trend. Volume that day was more than double the average. But for the past five weeks, the stock has been trading fairly tightly in a range mainly between 170 and 175, digesting that big surge, and building a base that will support a renewed advance. There’s short-term downside potential down to 165, where we find the stock’s 50-day moving average, but to me (in the absence of heavy volume), that would mark a great entry point. Buy.
Timothy Lutts, Cabot Stock of the Month, www.cabot.net, 978-745-5532, November 23, 2015