Earnings Preview: CA Inc - Analyst Blog

CA Inc. (CA) is scheduled to announce its third quarter 2011 results on January 25, 2011 and we do not see too much variation in analyst estimates at this point.

Second Quarter Overview

The company reported decent second quarter 2011 numbers, with earnings per share (EPS) of 46 cents, exceeding the Zacks Consensus Estimate of 44 cents.

CA delivered $1.110 billion in earnings, up 5.0% from $1.067 billion reported in the year-ago quarter. Revenue growth was noticed across all business segments except Subscription & Maintainance.

Within the geographical segments both North America and other International segments made major contributions. Total bookings in the second quarter were $1.018 billion, up 10.0% from $934.0 million reported in the prior-year period.

Operating income for the second quarter stood at $307.0 million (28.0% of revenue), down 9.43% from $339.0 million (32.0% of revenue) reported in the year-ago quarter. Moreover, CA is cash rich and exited the quarter with cash and cash equivalents of $2.525 billion, up from $2.470 billion.

During the first quarter conference call, management projected fiscal 2011 revenue growth in the range of 3% to 5% translating to revenue of $4.45 billion to $4.55 billion. Earnings per share on a GAAP basis are expected to grow in the range of 5% to 13%, two percentage points higher than the previous guidance, which translates to earnings per share of $1.54 to $1.66, while non-GAAP earnings per share are expected in the range of $1.85 to $1.97.

Agreement of Analysts

Out of the ten analysts providing estimates for the third quarter, fiscal years 2011 and 2012 only one has lowered estimates, while three analysts raised their estimates in the last thirty days. The unchanged estimates also point to the fact that there were no major catalysts during the quarter that could have a major impact on the results. Consequently, the analysts more or less stuck to their estimates. 

Cloud computing is the area in which the company is investing much of its financial and human resources and we agree that prospects in this segment are bright. However, the stiff competition that CA is up against should also be kept in mind. The space is slowly becoming crowded with big players, which temper CA's growth prospects in our opinion.

Some analysts believe that the company has attained much stability in free cash flow generation. Others have mentioned that the valuation is attractive considering its strong fundamentals.

Moreover, analysts believe that the company is in the early phase of adopting new computing architectures, which are expected to push top-line growth from the low single digits to the high single digits and keep earnings growth rates more or less in the same range.

 Magnitude of Estimate Revisions

 The magnitude of revisions is also minimal since the company reported its second quarter results. Overall, estimates for the upcoming quarter have moved up 1 cent over the last 90 days to 46 cents, with no changes in the Zacks Consensus Estimate over the past 30 days.

For fiscal 2011, Zacks Consensus Estimates have inched up to $1.81 from $1.80, 90 days ago. No change in estimates was noticed over the past 30 days. For 2012, the Zacks Consensus Estimate has moved up from $1.91, 90 days ago to $1.96, with an improvement of a penny over the last 30 days.

Recommendation

We are optimistic about the company's positive outlook for fiscal year 2011, its enhanced product portfolio, growing customer base and a revival in the macroeconomic scenario.

On the other hand, we are a bit concerned about the intense competition in the software and cloud computing space from big players such as International Business Machines (IBM) and Hewlett-Packard Company (HPQ).

We currently have a Neutral recommendation on CA Inc., with a Zacks #2 Rank (short-term Buy recommendation).

 
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