CIBC: Software Names Swinging Up Ahead of Earnings Season

A Canadian bank earned a double-digit return from its software sector picks in Q4 thanks to a strong three months for a mix of large and medium companies.

In a recent note, CIBC Capital Markets states that the companies it covers in the software space outperformed the S&P/TSX Composite Index (INDEXTSI:OSPTX) in the final quarter of 2019.

According to the bank, its 20 percent return from those stocks came during a “seasonally strong” period for software operations due to “customers looking to spend budget dollars prior to calendar year-end.”

As the market prepares for earnings season, the bank is advising that investors watch two large-cap companies in particular: Kinaxis (TSX:KXS,OTC Pink:KXSCF), a supply chain software company, and Open Text (NASDAQ:OTEX,TSX:OTEX), a company that offers information management solutions for clients.

The firm’s consensus forecast is that for 2019’s fourth quarter, Kinaxis and Open Text should report revenue increases of 42.25 percent and 2.26 percent, respectively, compared to their year-ago results.

Overall in Q4, CIBC is expecting a 15 percent uptick in revenues and a 29 percent rise in EBITDA year-on-year from the list of companies it is tracking in the tech sector.

Most of the companies the firm is following have market caps over C$1 billion, but one exception is Docebo (TSX:DCBO), which had a market cap of C$469.49 million as of Wednesday (January 29).

The Toronto, Ontario-based company is a newcomer to the public markets as it completed its initial public offering in October of last year. Following the offering, CEO Claudio Erba said the proceeds from the launch would give the company the option to scale up.

CIBC is maintaining an “outperformer” rating for shares of the company alongside a C$22 price target.

“We believe that Docebo remains an attractive investment opportunity given the company’s combination of below-market valuation, strong revenue growth, and demonstrated product market fit,” the firm indicates in its note.

Two other software names tracked by CIBC with market caps under C$1 billion are Information Services (TSX:ISV) and People (TSX:PEO).

According to the bank, Information Services dragged down the “business services” portion of its list as the Saskatchewan-based firm is having difficulties in the province’s slower economy.

Information Services provides registry and information management services specially designed for public data and records use. It offered a revenue guidance mark to investors of between C$135 million and C$139 million on Wednesday.

“Although we expect Saskatchewan’s economy to remain flat in 2020 as it pertains to our registries, Registry Operations will continue to be a strong contributor to results in 2020, due largely to the high level of operational efficiency and the resulting strong cash flow this business generates on a consistent basis,” the company indicated to investors.

CIBC has retained its “neutral” rating on the company alongside a price target of C$18.50.

For its part, People holds a “strong buy” ranking on analyst data aggregator site TipRanks and a price target of C$12 from CIBC. People offers group benefits, group retirement and human resource services.

“During 2020, we will maintain our focus on four key areas: sales and service; products; strategic acquisitions; and integration,” said Laurie Goldberg, executive chairman and CEO of People, as part of the company’s fiscal Q1 2020 results.

“We see substantial opportunity to continue to integrate our national platform in 2020 and beyond, to truly leverage our growing scale and national distribution footprint.

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Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.