CA Inc.

CA Inc. (CA - Analyst Report) recently delivered a triple play for the third quarter of its fiscal 2012: a positive earnings surprise, a positive sales surprise, and increased guidance from management. It was also the company's 7th consecutive positive earnings surprise.

This prompted analysts to revise their estimates significantly higher for both 2012 and 2013, sending the stock to a Zacks #1 Rank (Strong Buy).

In addition, the company announced a capital allocation plan that targets to return up to $2.5 billion to shareholders through fiscal 2014. It currently pays a dividend that yields 3.7%.

Valuation is attractive too with shares trading at just 11x forward earnings, well below the industry multiple.

Company Description

Formerly known as Computer Associates, CA Inc. makes software for mainframe and other corporate computers. It operates in 3 segments:

Subscription & Maintenance: (84% of total revenue)
Professional Services: (8%)
Software Fees & Other: (8%)

The company is headquartered in Islandia, New York and has a market cap of $13 billion.

Third Quarter Results

CA delivered a triple play for the third quarter of its fiscal 2012: a positive earnings surprise, a positive sales surprise, and increased guidance from management.

Earnings per share came in at 60 cents, crushing the Zacks Consensus Estimate by 18%. It was a 20% increase over the same quarter in 2011.

Revenue rose 10% to $1.263 billion, ahead of the Zacks Consensus Estimate of $1.210 billion, including an 8% increase in organic revenue. Each segment experienced solid revenue growth, with Services leading the way at 16%.

Geographically, revenue was strongest in North America, which saw top-line growth of 15%. Sales from North America accounted for 63% of total revenue. Internationally, sales were up 3%.

Operating income increased 24% year-over-year as the company leveraged its selling, general and administrative expenses.

Increased Guidance

Following the strong third quarter, management raised its earnings guidance for the remainder of 2012 and adjusted its revenue forecast to the upper end of its previous range. The company now expects to earn between $2.21 and $2.25 per share on revenue growth of 6%.

This prompted analysts to revise their estimates significantly higher, sending the stock to a Zacks #1 Rank (Strong Buy) stock.

The Zacks Consensus Estimate for 2012 rose from $2.02 to $2.13, which represents 11% growth over 2011 EPS. The 2013 consensus estimate increased from $2.21 to $2.39, and corresponds with 12% EPS growth.

You can see the huge jump in consensus estimates following the outstanding Q3 results:

Returning Value to Shareholders

On the same day it reported Q3 earnings, the company announced a capital allocation program that aims to return up to $2.5 billion to shareholders through fiscal year 2014.

The company increased its stock buyback program to up to $1.5 billion. It also significantly boosted its quarterly dividend from 5 cents to 20 cents per share. This translates to a stellar yield of 3.7%.

Reasonable Valuation

Shares have been soaring since these announcements, but the valuation picture still looks attractive for CA. Shares trade at just 11.3x 12-month forward earnings, a discount to the industry median of 14.1x and its 10-year median of 24.1x.

Its price to book ratio of 2.3 is also well below the industry median of 3.8 and its 10-year median of 2.9.

The Bottom Line

With estimates rising following its impressive triple play last quarter, and with a 3.7% yield and very reasonable valuation, CA offers investors attractive total return potential.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.