I have been holding a position in CA Technologies for about a half a year. During this time I have become familiar with one of their competitors, BMC. When I was building my CA position, BMC traded at a roughly 30% valuation premium to CA, even though it only offered slightly better growth. Since then BMC has fallen by 30% and now only trades at a slight premium to CA.
Like CA, BMC has a mainframe business and some growth businesses in cloud and virtualization. BMC billed itself as a cloud computing company and attracted growth investors who are now fleeing after disappointing growth. BMC now trades at less than 7 times forward free cash flow (excluding net cash). That is a dirt cheap valuation and they are aggressively repurchasing shares.
BMC's CEO spoke at a conference on Tuesday. We are two months into the quarter and the CEO said growth is on track for the quarter. It is unlikely that we will get another disappointment in the near future. I started a position in BMC yesterday as the valuation is compelling. The cheap valuation combined with an aggressive share repurchase plan should keep the downside in the stock limited. I believe a conservative fair value for BMC is in the mid forties.