Why Open Text Corp. Is up About 1%

Open Text Corp. (TSX:OTEX)(NASDAQ:OTEX) is up about 1% following its Q1 2018 earnings release. Should you buy now? Let’s find out.

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Open Text Corp. (TSX:OTEX)(NASDAQ:OTEX), one of the world’s leading providers of enterprise information management (EIM) solutions, announced its fiscal 2018 first-quarter earnings results after the market closed yesterday, and its stock has responded by rising about 1% in early trading today. Let’s break down the results and the fundamentals of its stock to determine if we should be long-term buyers today.

Strong demand leads to double-digit growth

Here’s a quick breakdown of 10 of the most notable financial statistics from Open Text’s three-month period ended September 30, 2017, compared with the same period in 2016:

Metric Q1 2018 Q1 2017 Change
Cloud services and subscription revenues US$193.85 million US$169.69 million 14.2%
Customer support revenues US$295.40 million US$210.21 million 40.5%
Licensing revenue US$78.23 million US$60.66 million 29.0%
Professional services and other revenues US$73.20 million US$51.11 million 43.2%
Total revenues US$640.69 million US$491.66 million 30.3%
Adjusted operating income US$201.14 million US$151.4 million 32.9%
Adjusted operating margin 31.4% 30.8% 60 basis points
Adjusted EBITDA $US219.92 million US$166.6 million 32.0%
Adjusted net income US$142.58 million US$105.51 million 35.1%
Adjusted earnings per share (EPS) US$0.54 US$0.43 25.6%

Should you buy Open Text today?

It was an outstanding quarter for Open Text, which shows that the momentum it had going in fiscal 2017 has carried over into fiscal 2018, and the results satisfied analysts’ expectations, which called for adjusted EPS of US$0.54 on revenue of US$631.52 million. With all of this being said, I think the market has responded correctly by sending its stock higher today, and I think it still represents a great long-term investment opportunity for three fundamental reasons.

First, it’s one of the industry’s best growth stocks. Open Text grew its adjusted EPS by 25.6% to US$0.54 in the first quarter of 2018, which puts it in a great position to achieve analysts’ expectations of 22.8% growth to US$2.48 in the full year of 2018. Analysts expect further EPS growth in fiscal 2019, with current estimates calling for 9.7% growth to US$2.72, and they have assigned a 16.2% long-term earnings-growth rate estimate.

Second, it’s undervalued based on its aforementioned growth. Open Text’s stock trades at just 13.9 times fiscal 2018’s estimated EPS of US$2.48 and a mere 12.7 times fiscal 2019’s estimated EPS of US$2.72, both of which are inexpensive given its current double-digit percentage earnings-growth rate and its estimated 16.2% long-term earnings-growth rate.

Third, it’s a stealth dividend-growth stock. Open Text currently pays a quarterly dividend of US$0.132 per share, equating to US$0.528 per share on an annualized basis, which gives it a respectable 1.5% yield. Foolish investors must note that the company’s 14.8% dividend hike in May has it on track for fiscal 2018 to mark the fifth consecutive year in which it has raised its annual dividend payment, and I think its strong operational performance will allow this streak to continue in fiscal 2019 and beyond.

With all of the information provided above in mind, I think all Foolish investors should consider making Open Text a long-term core holding.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned. The Motley Fool owns shares of Open Text. Open Text is a recommendation of Stock Advisor Canada.

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