Frank Fischer presented his in-depth investment thesis on Software AG (Germany: SOW) at European Investing Summit 2014.
Software AG: Develops and sells software for mainframes in the Enterprise Transaction Systems (ETS) segment, and middleware and big data solutions in the Business Process Excellence (BPE) segment. While the ETS business serves as cash cow and is structurally declining, BPE has a very high potential to benefit from the transition to a digital economy and the trend towards the “internet of things.” According to Gartner and Forrester research, Software AG offers best in class solutions in the BPE market. In the last few years, the company has been transitioning from the ETS business to BPE and, as a result, overall growth has been rather limited and profits could not grow. Also, the quarterly ups and downs (because of the quarterly reporting process) has weighed on the confidence in management. This will now slowly change as BPE has become the most important segment and will therefore lead to overall growth for the company again. Moreover, the stock has become rather cheap for a software company in such a growth area. With the shares trading at a ~10x P/E (adjusted for purchase price allocation), and at an EV-to maintenance level profitability of 4.5x, the equity is priced as if there would be no growth in the future. Fischer thinks that this is not a realistic assumption and therefore sees limited downside (given the high free cash flow), and significant upside as soon as Software AG is able to improve sales execution.
About the instructor:
Frank Fischer is a member of the board of directors of Shareholder Value Beteiligungen AG and of Shareholder Value Management AG in the function of Chief Investment Officer. Furthermore Frank Fischer is on the board of Pulsion AG. Until the end of 2005 he was managing director of Standard & Poor´s Fund Services (former Micropal GmbH) where he was responsible for investment fund data and ratings. In his business development role he ran the S&P Advisory business in the areas Hedge Fund Indices and US Equity in continental Europe since 2003. After an education as a banker at Hessische Landesbank he studied economics at the University of Frankfurt with a degree in economics. Mr. Fischer is married with two children.
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