Teradata Corporation increases buyback program
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On December 18th, 2014, Teradata announced that its board of directors authorized an additional $300 million for share repurchases. After this increase, the company now has approximately $450 million available under its share repurchase program. During periods of market declines and increased volatility, investors should adapt a more sober view of market and valuations. It is exactly during these periods that they should look at companies who take advantage of lower valuation of their stock and repurchase shares on an active basis. Importance of share buybacks is very clear: similar to dividends, it is one of the ways to reward shareholders and return the excess capital. Significant share buyback programs by companies are now announced almost daily. Market indexes that track the performance of companies that repurchase shares, as well as specific ETFs have been developed. For example, PowerShares Buyback Achievers Portfolio ETF (PKW) is based on an index that is comprised of US securities that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. This buyback ETF provided a +125% return over the past 5 years and had significantly outperformed the S&P 500 Index, which returned only +78% during the same period. Index providers and ETFs add or delete companies from the indexes “retroactively” depending on their buyback activity in the past, usually the last 12 months. More active investors might do well by looking “proactively” for companies that plan to repurchase their shares in the near future.
Teradata Corporation is a global leader in analytic data platforms, marketing and analytic applications, and related consulting services. Its analytic data platforms are comprised of software, hardware, and related business consulting and support services – for data warehousing, active intelligence, big data analytics, and data. Company’s applications are designed to leverage data to: improve organizations’ effectiveness in marketing to their customers, determine customer and product profitability, forecast consumer demand, and discover new insights. Teradata serves customers across a broad set of industries from around the world, including communications, financial services, government, healthcare, insurance, manufacturing, media and entertainment, retail, and travel and transportation – with offerings ranging from small departmental implementations to many of the world’s largest analytic data platforms and marketing applications.
Valuation summary and upside potential
Based on a recent share price, Teradata Corporation had market capitalization of $6.55 billion. Company had a net cash of $0.59 billion while enterprise value was $5.96 billion. Company is currently valued at an EV/EBITDA multiples of x9.5 and x8.8, based on annualized 9 months of 2014 and full 2013 year results, respectively. During 2013, Teradata generated $373 million in free cash flow, which equates to a free cash flow yield of 5.7%. Cash flow generation is higher so far in the current year and equalled $489 million during first nine months of 2014. Company does not pay dividend, but significantly increased the amounts spent on share repurchases. It spent $127, $277 and $382 million in the years 2011, 2012 and 2013, respectively. During first nine months of 2014, Teradata spent $282 million on share repurchases.
Our five year target price assumes an annual growth of 5% in EBITDA and 55% conversion rate of EBITDA into cash (based on FY 2013 results). Valuation multiple is currently low. A recent private equity buyout of Tibco Software was done at an EV/EBITDA multiple of x17, and a multiple of x14 based on adjusted EBITDA. We therefore assume a reasonably conservative valuation multiple of x12 for Teradata. Under these assumptions, in five years shares could be valued at about $86 per share, or an 100% upside from the current price. Attractive valuation, strong free cash flow generation ability, and recently increased share buyback program make Teradata Corp an interesting investment target for a long-term, value-oriented investor.