Open Text a ‘best buy’ among growth stocks

Open Text Corporation has dropped in price due to some uncertainties. This gives you an opportunity to buy these high-quality shares on the cheap. Buy them for long-term price gains as well as fair and rising dividends. It’s a ‘best buy’ among Canadian dividend growth stocks.

Waterloo, Ontario-based Open Text Corporation (TSX─OTC) is facing some uncertainties. This likely accounts for at least part of the 25 per cent fall in its share price since early spring. The uncertainty likely made some investors nervous. Our view is that the drop in Open Text’s share price makes it a compelling buy among top growth stocks.

One source of uncertainty is Open Text’s new focus on its cloud business. President and chief executive officer Mark Barrenechea says: “As our customers transition to the Cloud, we see this as our new growth opportunity, and our strategic focus is to lead the Cloud-based EIM [Enterprise Information Management] market.” Change always involves uncertainty, of course. Just remember that it’s wise of Open Text to change with the times. Tech companies that fail to adapt don’t remain among top growth stocks or, indeed, in business for long.

Even better, Open Text is managing the transition to cloud-based services. It notes that three years ago, it had no cloud revenues. Now the company generates over 30 per cent of its revenues from the cloud.  Its cloud innovations include “Open Text Core, Trading Grid 15, Enterprise Subscription, Enterprise Managed Services and IX [Information Exchange] Analytics. These cloud-based innovations will drive future growth.”

Open Text is an experienced acquirer among growth stocks

Adding to the uncertainty is Open Text’s plan to increase its cloud-based business through acquisitions. This includes the acquisitions of EasyLink, GXS and Actuate. Some investors may note that most acquisitions fail to live up to their expectations. In addition, major acquisitions can bring growth stocks down. On the positive side, Open Text has plenty of experience at acquiring and successfully integrating acquisitions. We expect its acquisitions to continue to succeed.

Open Text is also offering its services in new ways. For instance, it recently launched subscription and managed service offerings. The company has done well in this regard. It points out that 85 per cent of its revenues consist of recurring revenues. This adds to Open Text’s stability. But some investors may worry about missteps.

It’ll cut costs by $50 million a year

Open Text also started a restructuring program. Many investors see restructuring as bad news. Mr. Barrenechea says it’s “a simplification of our business structure around Enterprise, Information Exchange and Analytics, as well as a new Global Technical Services organization. This structure will allow us to scale as we continue to acquire complementary business over time.” The restructuring will cost $25 million. But it’s expected to cut operating costs by $50 million a year. This will add to Open Text’s earnings in fiscal 2016 (which begins on Canada Day). As a result, we view this action favorably.

One valid concern is about foreign exchange. Open Text reports its results in U.S. dollars. With the rise of the greenback, however, earnings from around the world turn into fewer U.S. dollars. In the fourth quarter, for instance, the company says that adverse foreign exchange rates will reduce its revenue by $44 million and its adjusted earnings by 11 cents a share—from the fourth quarter of fiscal 2014.

Open Text Corporation remains one of our best buys for growth among Canadian dividend growth stocks. The shares also offer you fair and rising dividends.

 

The Investment Reporter, MPL Communications Inc.
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