KUHN CAPITAL Sunday, February 25, 2018
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Teflon Becomes Computer Associates

June 9

If you took our advice and sold Computer Associates short last October, you lost money and we bad. The stock subsequently ran from $28 to $31 in late December, and has since settled back into the $28 range. So much for fundamental analysis.

But our attention has been drawn back to CA again because the companyís up to its old tricks: overpaying for targets. This time itís trading $350 million in cash for Niku, a $65 million vendor of technical consulting and corporate governance services (read Sarbanes Oxley compliance). The price represents nearly a 30% premium over Nikuís pre-announcement value. It also represents a multiple of 88 times Nikuís earnings.

Well, why not? The market is putting a forward P/E on CA stock of about 23x. And the stockís price fluctuations track more-or-less favorably against those of IBM and SAP. So, considering investorís apparent enthusiasm for the CA story, management can point to support for its apparently unending cycle of buying without integrating. CAís profit margin is 0.3%.

Laissez les bons temps rouler.

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