We reiterate our Neutral recommendation on CA Inc. (CA) post the second-quarter 2014 results.
Why the Reiteration?
Although CA reported better-than-expected second-quarter results, year-over-year top-line growth was disappointing. Despite a rise in Mainframe revenues, Enterprise solution segment revenues were affected by lower-than-expected new product sales which were primarily responsible for the revenue decline.
CA is gaining traction in the Mainframe Solutions, and Services segments. During the second quarter, CA’s mainframe revenues were aided by higher sales of new products and mainframe capacity.
We remain upbeat as CA’s cloud expansion and restructuring initiatives remain on track. A decent renewal rate, modest cash position and share repurchase activities also appear encouraging. The company’s endeavor to return cash to its investors in the form of dividend payments also boosts investors’ confidence.
Apart from this, bookings growth remains robust, supported by both North American and International bookings. The company is also witnessing an increase in license wins.
However, increasing competition from the likes of Hewlett-Packard Company (HPQ) and Oracle Corporation (ORCL) coupled with the European exposure remain concerns. A tepid IT spending environment is another factor that could impact CA’s results, going forward.
Moreover, the costs related to the company’s rebalancing plan will pressurize margins in the near term. Although, CA’s plan of redirecting the savings from the current restructuring initiatives to market its products and emphasize on brand recognition is a positive factor, execution issues and lower-than-expected sales despite the rebalancing initiative will have a negative impact on the company’s results.
Currently, CA has a Zacks Rank #3 (Hold). A better-ranked stock in the technology sector is SanDisk Corp. (SNDK) with a Zacks Rank #1 (Strong Buy).
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