Start Buying SAP on Consistent Earnings Results

SAP AG (NYSE: SAP)                                                                                 11/15/2012

Last Price: $71.21

VIEW:  START BUYING

SAP is the leading provider of enterprise resource planning software. The company tailors its products to meet the unique needs of various industries and has more than 180,000 customers in more than 120 countries. The company’s products include SAP Business Suite software, which enables companies to enhance their business and information technology (IT) strategies with an integrated portfolio of business applications and solutions designed to work with other SAP and non-SAP software.

Sector: Technology                                                                          Industry: Application Software

Highlights:

SAP AG provides enterprise application software and software-related services worldwide. Sap AG ADR has a market cap of $86.04 billion. The stock closed yesterday’s trading session at $71.21. In the past year, the stock has hit a 52-week low of $51.40 and 52-week high of $73.93. Technical indicators for the stock are bullish and the company has grown earnings annually at a market beating pace of 13.50% in the last five years.

GROWTH AND BALANCE SHEET

SAP is the world leader in the enterprise resource-planning software industry. Its sales for the most recent fiscal year came in at $14.23 billion, and its net income was reported at $3.44 billion. Since the same quarter one year prior, revenues rose by 33.6%. The revenue growth greatly exceeded the industry average of 2.2%. SAP AG’s earnings per share declined by 49.2% in the most recent quarter compared to the same quarter a year ago. The company has reported somewhat volatile earnings recently. The total Debt/Equity of 21.09% is high enough and above the industry average.

VALUATION

SAP has a PEG ratio of 1.51 above the industry average. Current PE at SAP stands at 22.42, at the industry’s average. The stock is currently trading above its intrinsic value of $68 this suggests that SAP is fairly valued at these levels. The beta of 1.36 implies high volatility of the stock with respect to the S&P 500. The company has a current annual dividend yield of 2.10%. The company is highly profitable with a profit margin of 23.9% and an operating margin of 31.8%.

RECOMMENDATION for next 6 months: We initiate our coverage with START BUYING. The company has demonstrated a pattern of bullish technical signs. Shares are 34.49% higher year to date as of the close of trading yesterday. Our overall score for SAP is 6.00

For options trading we suggest:

• Buy the March 13  call with a strike of 75.00 priced at $3.99 per contract
• Sell the January 13  call with a strike of 80 priced at $1.50 per contract
• Net Debit to start: $2.49
• Maximum risk: Net debit

NEWS and CALENDAR

01/23     Earnings Call

Thursday October 25, 2012 –

Wednesday November 14, 2012 – SAP Readies SAP HANA® Platform for Mission-Critical Applications in the Enterprise

Wednesday November 14, 2012 – SAP Names Bob Calderoni to Global Managing Board

Tuesday November 13, 2012 – SAP Accelerates Innovation in the World’s Largest Business Network

SAP Strengths

• Brand Name
• Global Market Leader
• End to End IT Solutions

SAP Weakness

• Foreign Exchange risk
• High R&D cost

Stock valuation model

The model rates stocks from 1 to 10, with 10 being the best using a system of advanced mathematics to determine a stock’s expected risk and return. I am using different fundamental and technical factors in order to rank a stock.

Intrinsic value of the stock

Investors should buy stocks selling at a discount to their intrinsic value, and then patiently wait for the fair value of their investments to be realized.

SAP’s intrinsic value is $68.00 the current price is $71.21, the stock trades 5% above its fair value.

Financials

The financial health of the company the higher the better, we evaluate all the financial ratios of the company.

Sentiment

Investor’s sentiment for the stock

Analyst ratings

The model assigns a value according to analyst’s recommendation for the stock.

Earnings Consistency

We are searching for EPS numbers that are better than the previous year’s. One dip is allowed, but the following year’s earnings should be higher than the previous year. DECK’s annual EPS for the last 5 years were 2.04, 2.01, 1.91, 1.98, 3.75 this type of earnings action is not favorable.

Total Debt/Equity

The company must have a low Debt/Equity ratio, which indicates a strong balance sheet. The Debt/Equity ratio should not be greater than 20% or should be less than the average Debt/Equity for its industry

SAP’s Total Debt/Equity of 21.09% is acceptable.

EPS This Quarter VS Same Quarter Last Year

The EPS growth for this quarter relative to the same quarter a year earlier is above the minimum 15% that this model likes to see for a “good” growth company. Stocks with improving earnings are worthy of your extra attention.

SAP’s EPS growth for this quarter relative to the same quarter a year earlier is -49.23% well below our target.

Annual Earnings Growth

This stock valuation model looks for annual earnings growth above 12%, but prefers higher than 20%.

SAP’s annual earnings growth rate over the past five years is 13.50%, above our target growth rate.

Current Price Level

Investors should keep an eye open for stocks that are trading within 10% of their 52-week highs, as it is likely to continue in its upward trend.

SAP’s 52 week high is $73.93 current price is $71.21, is only 4% below the 52 week high.

P/E Ratio

The Price/Earnings (P/E) ratio, based on the greater of the current PE or the PE using average earnings over the last 3 fiscal years, must be “moderate”, which in this model states is not greater than 15. Stocks with moderate P/Es are more defensive by nature.

The company has a P/E ratio of 22.42 the average industry P/E ratio is 22.54 and is also well above the S&P 500 P/E ratio of 15.30.

Insider Ownership

When there is strong insider ownership which we define as 8% or more, management is more likely to act in the best interest of the company, as their interests are right in line with that of the shareholders.

Insiders own 0.00% of SAP stock. Management’s representation is not large enough. This does not satisfy our minimum requirement; companies that pass this test are more attractive to our valuation model.

Technical Analysis

The model is using several technical indicators (MACD, RSI, MFI, OBV, position Indicators) to forecast the trend of the stock for 6 and 12 months, and assign a value.

SAP is trading in the range of $68.25 – $73.93 in the past 30 days. The Commodity Channel Index (CCI) is bullish for SAP. SAP stock has been showing support around $68.50 and resistance in the $73.90 range. Our indicators give a bullish view on SAP.