My latest column is up at RealMoney.

With the stock market flirting with “official” bear market territory, I realized I hadn’t written a bearish piece in a couple of months. Not wanting to buck the trend any longer, I decided to look through the models I follow to see which stocks might be on the pricey side. I think I found one in ACI Worldwide (ACIW) .

ACI develops, markets, installs and supports a broad line of software products and services primarily focused on facilitating electronic payments. The company’s products and services compete with offerings by Fiserv (FISV - Annual Report) , Fidelity National Information Systems (FIS) , S1 Corporation (SONE) , Metavante (MV) , Euronet (EEFT) , Fair Isaac (FIC) , Visa (V) and MasterCard (MA) .

About the only argument one can make in favor of a long position is that the stock has come down a lot — nearly 50% from last July’s peak. Unfortunately, at last July’s peak it had already come down a lot from the prior year’s peak. It is amazing to me that a stock performing so poorly can still be valued as highly as it is. For now, I’m not counting on a reversal in price momentum.

For those of ACI Worldwide’s peers that have earnings on which to base a P/E multiple, the average P/E is about 16. At 16 times the 58-cent current 2009 consensus estimate for ACI Worldwide, the stock would trade at just $9.28 — 46% below the current level. Even at the 21 times multiple S1 enjoys, the downside could be 30%. And those prices assume the company will actually earn what analysts believe it will. As noted earlier, that has not been a safe bet of late.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

My latest column is up at RealMoney.

Ikon Office Solutions (IKN) was recently upgraded to buy by TheStreet.com Ratings, and as I look at the fundamentals, it isn’t hard to see why.

As the world’s largest independent channel for document management systems and services, Ikon enables customers worldwide to improve document workflow and increase efficiency. Ikon integrates best-in-class copiers, printers and multifunction product technologies from manufacturers such as Canon (CAJ) , Ricoh, Konica Minolta and Hewlett-Packard (HPQ - Annual Report) with document management software from companies such as Captaris (CAPA) , Kofax, eCopy, Electronics for Imaging (EFII) , EMC Documentum (EMC - Annual Report) and others.

Ikon is trading at just 0.78 times book value, well below the industry average of 1.39 times. Although much of that book value is represented by intangible assets, the same can be said of many companies in the industry. Xerox (XRX) , for example, has nearly half of its book value represented by goodwill. For Pitney Bowes (PBI) , it is more than 100%.

Meanwhile, analysts expect Ikon to grow 12% annually over the next three to five years. This estimate is exactly in line with the average growth rate expected for the industry. I don’t see why a stock growing at the same rate as the industry should trade at half the industry’s price/book multiple — especially when its free cash flow is so strong. I believe the valuation should expand to the industry average. If the price/book multiple can expand to the industry average over the next five years, then even if the company only manages to grow at the 8.6% rate forecast by the Street’s most conservative analysts, the total return could exceed 20% annually.

Disclosure: At time of publication, William Trent has no financial position in the companies mentioned in this article.

William Trent currently has a short position in put options related to Office Depot (ODP).

This morning Ansys (ANSS) announced it would buy Ansoft (ANST - Annual Report) for $16.25 per share in cash and 0.431882 shares of Ansys. A conference call discussing the deal will be webcast at 11:30 EST.

Ansoft is a leading developer of high-performance EDA software. The software is based on more than 25 years of research and development by world-renowned experts in electromagnetics, circuit and system simulation. Engineers use Ansoft products to simulate high-performance electronics designs found in mobile communication and Internet devices, broadband networking components and systems, integrated circuits, printed circuit boards and electromechanical systems. The company’s products are used by blue chip companies as well as small- and medium-sized enterprises around the world.

The acquisition of Ansoft is ANSYS’ first foray into the broader EDA software industry and will enhance the breadth, functionality, usability and interoperability of the combined ANSYS portfolio of engineering simulation solutions.

The “first foray” signals that Ansys won’t be getting much, if any, synergies from the deal. Nor did the press release predict any. The fact that both companies are headquartered in Pittsburgh will minimize costs related to the combination, but that is about it.

Investors signaled their distaste for the deal by sending Ansys shares down more than 7%. In fact, the two companies now have a combined market cap that is $100 million lower than it was before the deal was announced. This could represent investor’s view of the value being destroyed by the deal, or the costs associated with combining the two companies. This is a big contrast to the positive reaction given to the acquisition of Fluent in 2006.

As an Ansys shareholder, I am disappointed that the shares are lower. However, I still think Ansys works in an attractive market segment and am willing to give some benefit of doubt to a management team that has quadrupled shareholder wealth over the last four years.

Disclosure: William Trent owns shares of Ansys (ANSS)

My latest column is up at RealMoney. In it, I explain why I think the negative reaction to BMC Software’s (BMC) purchase of BladeLogic (BLOG) was overdone. In summary:

BladeLogic is growing nearly 40% annually, compared to just 5% expected growth in BMC next year. By my calculations, it increases BMC’s revenue growth rate by 180 basis points, which should have a significant impact on valuation models.

What’s more, I think there were signs that BMC’s growth was due to accelerate on its own. Deferred revenues had declined slightly over the past nine months, which can act as a drag on revenue growth in future periods. But license sales are up 13.5% so far this year, compared to total growth of less than 9%. Today’s license sales should increase future maintenance and service revenues.

Although the BladeLogic deal is expected to reduce BMC’s 2009 per share earnings by 10 or 11 cents, BMC’s estimates for 2009 had already risen by a similar amount. Effectively, the dilution from BladeLogic offsets BMC’s organic improvements for a year.

Meanwhile, BMC has generated more than $540 million in free cash flow over the last 12 months. Some of that is unsustainable, as it comes from collecting on financed receivables. However, I think the sustainable free cash flow is more than $400 million. That still amounts to a 6.5% free cash flow yield at a time when five-year Treasuries return a paltry 2.2%.

Alternatively, I think the stock can generate double-digit returns over the next few years by virtue of its growth, despite a potential reduction in valuation multiples.

Disclosure: William Trent has no financial position in the companies mentioned.

My latest column is up at RealMoney. You can read the full article there, but here is a summary:

Adobe has also generated nearly $1.5 billion in free cash flow over the last 12 months, which gives it a free-cash-flow-to-enterprise-value-yield of more than 9%. That is nearly a 400% premium to the five-year Treasury yield.

Of course, the last six months have shown that attractive valuations can get you nowhere (or even put you in the hole). That is why the catalyst provided by the likely release of Creative Suite 4 becomes so important.

If Creative Suite 4 pans out like any of the last three product cycles, investors should start getting excited about it sometime between now and July. With consensus 2009 earnings estimates already at $2.07, a P/E expansion to 30 times gives a potential target of $62, up from a current $35.

If the thesis continues to play out, I’ll be able to stop kicking myself for jumping the gun.

Disclosure: William Trent owns shares of Adobe (ADBE)

My latest column is up at RealMoney. It is about Websense (WBSN), which provides companies with Internet security tools. In brief, I like the company, but I’d like it more at a different price.

The $48 million in free cash flow Websense generated last year equates to a 5.1% free-cash-flow yield, about double the yield on five-year Treasuries. Analysts are projecting a 13% growth rate over the next five years, but 28.4% for this year. Given the growth in deferred revenue, I think this year’s growth number will be easily met. That means that the 13% five-year rate only requires 9.5% growth in the remaining four years.

With estimates rising, the growth estimates appearing conservative, and a solid free-cash-flow yield, I like the prospects for Websense over the longer term. However, I’ll be approaching an investment cautiously. On the fundamental side, I’d like to see the earnings quality and cash-flow improvements start to show up. Absent that, the chart could look a bit stronger — especially given the whipsaw market we’ve been in lately.

I’d normally look at writing put options here, but the price is too far from any strike price to make the premium sufficiently attractive to me. Whether higher or lower, I’d prefer a different entry point. A pullback to recent lows would boost the free-cash-flow yield above 6%. Alternatively, better price action would give me more confidence that the bottom is really in place.

The full article is available at RealMoney.

I should probably learn to take the money and run more quickly. Back in December I wrote about Diebold (DBD) at about $33 per share and said investors should probably look elsewhere due to earnings quality concerns and what I considered to be unsustainable cash flows. That looked good until this morning, when the takeover offer from United Technologies (UTX) sent the shares up from $25 to $39.

In the interest of full disclosure, this is the third time in as many months that a takeover bid has made one of my bearish calls look stupid (at least temporarily.) In September I wrote bearish pieces on both Yahoo (YHOO) and Delta Airlines (DAL) at prices of $23.30 and $17.65, respectively. I no longer look stupid on Delta since their deal appears to have run aground.

Interestingly, of the three Delta was the only one whose management actually wanted the deal. We’ll have to see whether the Yahoo and Diebold hostile bids suffer the same fate.

Position: No financial positions in the stocks mentioned

Clearly Autodesk (ADSK) wasn’t as safe as I thought. The question of what to do with it now would be easier if the miss made more sense. Company claims $0.05 reduction in full year EPS is due to accelerated hiring in order to make “product investments.” But if the products are being enhanced, why isn’t the revenue guidance being increased for the full year?

Stock was already cheap (and is much cheaper today) but until the “investments” start to earn a return they are just “costs.” I’d like a better explanation of what’s going on before feeling comfortable with the name again.

Disclosure: No position held

I have long been a fan of engineering simulation software developer Ansys (ANSS), and in January I bought shares for my personal account. Today I was rewarded for that position when ANSYS reported earnings.  In addition to beating the consensus estimate for 2007, the company raised guidance for the coming quarter and full year.

The Company currently expects the following for the quarter ending March 31, 2008: GAAP revenue in the range of $103 – $106 million
GAAP diluted earnings per share of $0.24 – $0.26
Non-GAAP diluted earnings per share of $0.33 – $0.34

Fiscal Year 2008 Guidance

The Company currently expects the following for the fiscal year ending December 31, 2008:

GAAP revenue in the range of $442 – $447 million
GAAP diluted earnings per share of $1.12 – $1.19
Non-GAAP diluted earnings per share of $1.48 – $1.51

These are better than the prior consensus estimates of $435 million in sales and $1.37 in earnings per share for the full year, and also above my own estimate of $1.06 in GAAP EPS. (I always maintain that if GAAP stands for Generally Accepted Accounting Principles, then non-GAAP must stand for unacceptable accounting.)

My prior analysis had indicated a fair value of $46 per share. With no other changes than the updates to existing estimates for 2008, the value rises to $48. Given the decline in interest rates since then, a much higher value could be justified. Since the $48 is still well above the current valuation, I see no need to make such justifications for continuing to hold.

Disclosure: Long Ansys (ANSS)

This article is a reprint of my February 11, 2008 RealMoney column

After Cognizant Technology Systems (CTSH) declined sharply upon reporting its third quarter results, I said the stock was looking like a high-growth value trap. Since that article, the stock has declined 5.3%, though Friday’s 15% rally (spurred by the company’s fourth quarter results) puts it ahead of the 10.1% loss in the S&P 500 over that period.

Jay Somaney outlined a solid case for why he believes Cognizant’s report marked the bottom for Indian tech stocks. While I encourage anyone interested to read his article, when I dug into the report I came away with the opposite conclusion, and remain bearish on Cognizant.

The problem boils down to this: Cognizant executed so well on so many different metrics this quarter that anything less than perfection in the future is likely to disappoint.

To start with, for a consulting business like Cognizant’s revenue growth has to come from either adding more employees or increasing their productivity. Historically Cognizant has done more of the former, but it has now begun shifting to the latter.

Cognizant ended 2007 with 55,400 employees, a 38% increase from year-end 2006. The 16,500 net new employees were slightly above the 15,000 added in 2006, though staff turnover declined for both the quarter and the full year. For 2008, Cognizant is guiding for 17,000 to 20,000 additional net recruits, which amounts to about 33% growth in headcount.

Meanwhile, the company is projecting revenue gains of “at least 38%.” While there is certainly room to increase utilization from the current 56%, there is a limit to how much can be done. What’s more, with the increased productivity I would normally expect an increase in operating profit margins. Yet the company is guiding to the same 19-20% operating margin range that they always have, and that is “assuming no material appreciation in the Rupee” versus the dollar. To me, that implies that the higher productivity is being offset by higher wages for employees.

There’s also room for doubt around whether performance can be sustained in the financial and retail sectors, which both grew about 50% in 2007.

To make things worse, Cognizant has benefited from tax breaks in India, which are set to expire in March 2009. The tax rate is expected to rise from 16.5% this year to about 25% in 2009 as a result. Over time, it is likely to gradually creep toward the statutory 33.66% rate in India. But for 2009 the drag will be significant, keeping the EPS growth rate well below the growth in revenue.

I frequently gauge the quality of reported earnings by measuring the accrual ratio, or the change in operating assets as a percentage of average net operating assets. As a measure of the percentage of earnings explained by accounting choices rather than cash flow, ideally the ratio should hover around zero. After several quarters of improvement or stabilization, Cognizant’s earnings quality deteriorated significantly.

Sources: Zacks Research Wizard and company filings, compiled by William A. Trent

On the positive side, the company overcame my concern that headcount growth was stuck at 15,000 per year. Plugging in potential increases in the number of employees added each year improves my five year outlook for the shares, which previously suggested little growth in share price over that time.

Unfortunately, though, it isn’t enough to whet my appetite. After incorporating both the higher head count and the higher tax rate, my new best-guess estimate of the price in five years is about $47 per share. At less than 6.5% per year in expected returns, I see greener pastures elsewhere.

Disclosures: None

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