Progress Software Stock Still Has Some Upside

by Trefis Team
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We believe that Progress Software stock (NASDAQ: PRGS) has an upside potential of 11% post pandemic, as business IT spending recovers to pre-corona levels. Progress Software, provider of solutions for developing and deploying business applications, trades near $40 currently and it has lost 3% in value year-to-date. It traded at a pre-Covid high of $44 in February, and is 10% below that level now. Also, PRGS stock has gained 33% from the low of $30 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government has helped stock prices recover to some extent. That said, the stock is lagging the broader markets by a wide margin, despite positive investor sentiment toward the software industry in general due to no direct Covid-19 impact. This could be attributed to the expectation of weak Q3 results with a drop in both product licenses and subscription revenues. Despite some growth in PRGS stock since late March, we believe that the stock still has room to grow in the near future. Our conclusion is based on our detailed analysis of Progress Software’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

  • 12/12/2019: Coronavirus cases first reported in China
  • 1/31/2020: WHO declares a global health emergency.
  • 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
  • From 3/24/2020: S&P 500 recovers 56% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how PRGS and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of the S&P 500 index
  • 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

Progress Software vs S&P 500 Performance Over 2007-08 Financial Crisis

PRGS stock declined from levels of around $13 in September 2007 (pre-crisis peak) to levels of around $7 in March 2009 (as the markets bottomed out), implying PRGS stock lost 50% from its approximate pre-crisis peak. This marked a similar drop as the broader S&P, which fell by about 51%.

However, PRGS recovered strongly post the 2008 crisis to about $12 in early 2010 – rising by 83% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period. 

Progress Software’s Fundamentals in Recent Years Look Strong

Progress Software revenues saw a meager growth of 9% from $377.6 million in 2015 to $413.3 million in 2019, mainly driven by the OpenEdge segment. Further, the company’s net income improved from -$8.85 million to $26.4 million, resulting in a stellar EPS growth from -$0.17 in 2015 to $0.59 in 2019. While the company’s Q2 2020 revenues were at the same level seen a year ago, the EPS figure for the quarter increased from $0.18 in Q2 2019 to $0.37 in Q2 2020.

Does Progress Software Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Progress Software’s total debt increased from $135 million in 2016 to $291.2 at the end of Q2 2020, while its total cash decreased from $249.8 million to $203.6 million over the same period. The company also generated around $71 million in cash from its operations in the first half of 2020, and it appears to be in a good position to weather the crisis.

CONCLUSION

Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-October 2020: Poor Q2 results and lukewarm Q3 expectations, but continued improvement in demand, a decline in the number of new cases, and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10 and because of the improvement in Progress Software’s stock since late March, this suggests a potential recovery to around $44 (11% upside) once economic conditions begin to show signs of improving. This marks a full recovery to the $44 level Progress Software’s stock was at before the coronavirus outbreak gained global momentum.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

 

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