Balanced View of Compuware

We retain our ‘Neutral’ recommendation on Compuware Corporation (CPWR - Analyst Report). While Compuware appears perspicacious about attaining its pervasive long-term targets, certain lingering downsides still pose a threat to the stock.

The Vantage, Gomez and dynaTrace acquisitions have turned into crucial growth drivers for the company’s Application Performance Management (APM) business unit making Compuware prescient of favorable yields accruing in the coming years. The company currently projects revenues of up to $544 million in 2015 from APM as technology gallops through the era of cloud computing solutions and online applications.

Returning optimum value to shareholders is a matter of primary importance to Compuware. The company thus bought back shares of nearly $4.3 million of its common stock during the first nine months of fiscal 2012.

Compuware bears it in mind that an investor who is wont towards retaining confidence in companies with proactive attitudes bent on achieving long-term goals, may be less solicitous of short run fluctuations in the economy. In fiscal year 2012, Compuware expects total sales to be around $1.04 billion which is likely to surge up to $1.45 billion later in 2015. Furthermore, certain cost reduction techniques implemented by management bolsters operating margins to increase from 15% in 2012 to almost 26.5% in 2015.

However, certain irrefragable threats remain pertinent to the company’s stock, marring most of the panegyrics collated by Compuware in recent times. One such factor is the company’s unavoidable over-dependence on IBM, which makes it obligatory to moves and fluctuations accruing from IBM’s desk at any point of time.

Compuware generated almost 24% of its revenues from its foreign markets during the first nine months of fiscal 2012. It is noteworthy that foreign currency fluctuations pose an interminable threat to the performance of the company; even more so when the global economy is passing through a period of widely precarious conditions.

The competitive nature of the industry often makes Compuware’s achievements ephemeral as big players adopt economic moves faster. Guidance Software, Inc. (GUID - Snapshot Report), Dassault Systemes SA (DASTY) and Avid Technology, Inc. (AVID - Snapshot Report) continue to report most impressive financial results even in a clouded fiscal scenario, making it awfully ominous to Compuware.

We expect Compuware to face significant challenges in the near-term, due to which we find it fit to maintain a sideline view on its stock. The company currently retains a Zacks #3 Rank, which translates into a short-term ‘Sell’ rating.