On Feb 7, 2014, we upgraded our recommendation on CA Inc. (CA) to Outperform from Neutral based on its favorable prospects and improved guidance for fiscal 2014. The company reported better-than-expected third-quarter results. Moreover, the company’s bookings increased year over year, led by an increase in contract renewals.
Why the Upgrade?
CA has delivered positive earnings surprise in each of the last four quarters, with an average beat of 16.78%. Moreover, CA delivered robust earnings in the third-quarter of fiscal 2014 which not only surpassed the Zacks Consensus Estimate but also increased 33.7% on a year-over-year basis.
Additionally, management provided an encouraging outlook for fiscal 2014. Total revenue is expected to decline in the range of 1.0% to 2.0% to $4.52 billion to $4.57 billion (previous expectation of 2.0% to 3.0% decline). CA expects non-GAAP earnings per share from continuing operations to increase in the range of 21.0%–24.0% to $3.05–$3.12 (previously 17.0%–20.0% to $2.96–$3.03) and ahead of the Zacks Consensus Estimate of $2.95.
Despite the increasing competition from Oracle (ORCL) and Hewlett Packard (HPQ) and exposure to Europe, 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 investor confidence.
The strong results and guidance led to positive estimate revisions for fiscal 2014. All the five estimates for 2014 were revised upwards over the past 30 days. This led to a significant increase of 9 cents in the Zacks Consensus Estimate for fiscal 2014, which now stands at $2.95 per share.
CA currently carries a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Another stock that is worth considering within this sector is Western Digital Corporation (WDC) carrying a Zacks Rank #2 (Buy).
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