Another Golden Opportunity in Citrix Systems

Software maker Citrix Systems (CTXS) was one of the ten stocks I highlighted on the 2006 Peridot Capital Select List (which, by the way, has returned 18% year to date – look for an announcement about the 2007 Select List in early January). After posting a gain of 40% through the first six months of the year, in my Select List Mid-Year Update I recommended investors take their profits as the stock traded above $40 per share. It appears that we are getting another chance to make money in the name.

After an earnings disappointment, Citrix is trading back down to $28 and change, which is where I recommended purchase at the beginning of the year. Given that the company has the ability to grow sales and earnings at a low to mid double digit rate, the current valuation looks very attractive.

Estimates for calendar year 2007 stand at about $1.50 per share. The company’s balance sheet is pristine, with no debt and $736 million in cash, which equates to $4 per share in net cash. So, investors buying CTXS at $28 are getting a stock with an enterprise value of only $24 and $1.50 in earnings power. This equates to a 16 forward P/E multiple, which in my view is too pessimistic given Citrix’s growth outlook.

I would expect Citrix shares to head well into the thirties again during 2007, and as a result, suggest investors reenter the stock. Evidently, CTXS management agrees the shares are undervalued, as they just announced a new $300 million share repurchase authorization.

Full Disclosure: I own shares of Citrix Systems (CTXS), as do Peridot clients.

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2 Thoughts on “Another Golden Opportunity in Citrix Systems

  1. semiplayer on November 8, 2006 at 2:34 PM said:

    Chris – If you are going to subtract the cash per share from the stock price. You need to subtract the interest income associated with that cash from the EPS. You can’t use the $1.50.

  2. Chad Brand on November 8, 2006 at 3:32 PM said:

    It’s Chad, not Chris. But anyway, if you deduct the interest income from the EPS number, that’s fine. However, then you have to value the $4 per share in net cash at more than just $4, because now you are assuming that money is earning a return. So, while your valuation would go down if you remove the non-operating income from the EPS number you apply a multiple to, you would also have to make upward revisions to the present value of the cash. Also, keep in mind that much of that will be used for buybacks, so it won’t earn interest. But yes, you are correct in theory, I just think it’s immaterial to my analysis.

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