Could Reckon be a buy as some analysts are speculating? The Motley Fool's investment analyst, Dean Morel, sees a quality company with a price tag to match.
In mid-July Reckon Ltd. (ASX: RKN) signed a memorandum of understanding (MOU) with Intuit Inc – a $14b US software company, 42 times the size of Reckon – for the joint development of a "mid‐market" or "light" version of APS' professional accounting practice management software.
Brendon Lau in The Australian Financial Review (AFR) speculated the recent $340m bid for another IT company, CSG Limited (ASX: CSV), along with the Intuit deal, could make Reckon a target. He further speculated that it "could be cheaper for Intuit to buy Reckon".
I Reckon it's not
Reckon has fabulous recurring revenue, as you'd expect from a software company. That revenue combined with a pristine balance sheet, consistently strong cash flow, excellent net profit margins and a light asset base makes Reckon a quality company I'd like to own.
Though not a today's price. At $2.50 Reckon is expensive. It's priced for high growth which may not transpire.
Yes, Intuit could easily swallow Reckon whole. The price would be less than half a year's cash from operations for Intuit. With its strong acquisitive history I'm sure Intuit will or has already run its ruler over Reckon.
However, a buyout is a long shot, and should be given little consideration when evaluating the possible returns from Reckon.
How about CSG?
CSG has grown faster than Reckon, albeit via acquisitions, and trades for a lower price to earnings multiple. Even at $1.20 – the non-binding bid – CSG will be considerably cheaper than Reckon on a relative basis.
At $1.05 CSG deserves more attention that Reckon. The current price gives a 14% return in a few months, if the $1.20 bid is successful. The bid could go higher increasing the return, or CSG could prefer to continue alone.
If CSG continues alone everything hinges on the quality of its acquisitive spree. Over the last four years CSG spent $215 million on acquisitions. That was funded by share sales, while over $60 million in new debt and retained earnings covered dividends and a ballooning working capital.
Foolish bottom line
If you want to play the acquisition game then CSG is a more attractive play than Reckon, though make sure to dig into CSG's acquisitions, just in case the bid falls through.
Reckon is an excellent company and an Intuit buyout could happen. Unfortunately its share price offers no margin of safety and lots of downside if it trips along the way.
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Dean Morel is The Motley Fool's Investment Analyst. Dean has no positions in any shares mentioned in this article. The Motley Fool's disclosure policy should be widely acquired.
