Thursday, May 5, 2016

Analysis of SAP 2016

SAP, a German software & service company

Company: SAP 

ISIN DE0007164600 | WKN 716460 

Business: A German software and software related services company. They seem to have a difficult identity crises at the moment have two business lines: Services and the second is Cloud and Software. Cloud and Software have two business lines underneath it and those are: Cloud subscriptions and Support and the second one is Software licenses and Support. But wait... Software licenses and Support ALSO have categories underneath it namely Software licenses and the second one is Software support. Well done SAP. I also very much enjoy how your CEO is greeting the not shareholders but stakeholders with his sunglasses on inside the board room as if it would be a beach in Florida or something. Hopefully there is a medical reason behind it because otherwise...

Active: 190 countries world wide. 

P/E: 28.1

Here you can find the previous analysis of SAP 2015

contrarian values of P/E, P/B, ROE as well as dividend for SAP

The P/E for SAP is awful with 28.1 and the P/B is only slightly better with 3.7 still we get a very clear no go from Graham. The earnings to sales looks pretty ok with 15% and the ROE is also ok but not more with its 13.2%. The book to debt ratio is very good with 1.3.
in the last five years they have had an excellent yearly revenue growth rate of 7.9%! which then gives us a motivated P/E of 19 to 24 which still means that SAP is overvalued by the market today.
They try to stay at the top of the hill and therefore they spend over 90% on R&D. I find it to be a lot but hey... whatever it takes!
They pay a silly dividend in the size of 1.6% which still correspond to 46% of their earnings which to me means they better keep pushing up those earnings!

Conclusion: Graham says no to SAP and so do I. The P/E, P/B, ROE as well as the dividend are simply not good enough for making this an interesting investment. Even worse though is that int he last five years they have gone from 12 billion to almost 21 billion in revenue but their margin have dropped so much that their earnings have been pretty much flat around 3 billion. Not impressive SAP, not impressive at all. I would stay away from SAP for the time being.

If this analysis is outdated then you can request a new one.


Anonymous said...

CEO had an accident in the stairs at home so I'm not sure if he lost his second eye or it is severely damaged. I think that is the reason for the sunglasses.

The margins have shrunk because of shift to cloud. The margins should really start to recover from 2018 onwards when the cloud business has become big enough. Now, investments in the cloud are so heavy that margins are low in that business segment.

Anonymous said...

Thank you for the feedback. Good that my second thought was more or less correct. I wish him a quick recovery if possible.

I hope that you are correct in what you say. I was expecting something similar from IBM but those margin increases never appeared.

-Fredrik von Oberhausen

Anonymous said...

With IBM, you could clearly see from the top line that something is not right. This is not the case with SAP which has seen strong growth. The margin recovery is a risk I admit, but at least the markets are believing in it and that is a good sign. In addition, it sounds as well logical that when the investment period is over in a few years and there is even more demand for the cloud business, margins should improve - as long as the cloud keeps growing. So, I think with SAP so far all looks good (apart from massive goodwill).

Fredrik von Oberhausen said...

Hmmm... I do not agree with you fully. I find IBM and SAP to be very similar in terms of problem with the difference that I can get IBM at half the price of SAP (P/E wise that is).

Looking at IBM then they have had flat revenue and flat earnings for a long time now. The conversion from producing hardware have costed them a lot in revenue and I find it impressive that they have managed to keep it up pretty well. The margins should have gone up but they have not which we can also see for SAP. So to me... both of them have had, in the continued operations, increased revenue, decreased margins and decreased earnings. IBM have countered that by buying back a lot of shares to at least make the EPS look better.