We reiterate our Neutral recommendation on MICROS Systems, Inc. as we believe that the risk-reward profile of the company is currently balanced. We are optimistic on the company’s strategic contract wins and share repurchase initiatives, which are expected to neutralize the effects of the clouded macro-economic conditions and ominous competition prevailing in the industry.
The company’s best-in-class services, well-diversified business portfolio, long-term and steady working histories with its clients are the key growth drivers which helped it establish itself in a formidable position within the hotel information systems market. Additionally, the company’s newly introduced product ranges including point-of-sale solution (POS), OPERA Enterprise Solution (OES), Restaurant Enterprise Series (RES) and many other advanced platforms are constantly supporting its businesses and setting the stage for further growth.
Various strategic contract wins hold future pledge for MICROS. The company confirmed winning a bunch of contracts from Carino’s Italian, Moran & Bewley’s Hotel Group, Delaware North Companies, Delta Hotels and Resorts, Aston Hotels & Resorts, LLC, Rex Restaurant Associates, Delaware North Companies and many more during fiscal 2012. We believe that these agreements are likely to heighten the company’s revenue stream in future.
Further, one aspect, which has forever been an integral part of MICROS’ total approach, is its desire to return optimum value to its shareholders through buy back activities. During the first quarter of fiscal 2012, the Board of Directors had approved a stock buy-back program authorizing the company to repurchase up to 2.2 million shares over the next three years. Under this share authorization program, the company repurchased nearly 1.3 million shares during fiscal 2012 out of which 110,000 shares were bought back in the fourth quarter of fiscal 2012.
However, the scenario is not really as bright as it appears as certain issues still continue to be troublesome for the company. Business for MICROS was adversely affected by the weak economic condition. Weakened consumer spending and difficulties in obtaining credit negatively prevented customers from acquiring or opening new hospitality and retail venues. Although the economy is showing signs of revival, customer spending is still quite low.
The company’s significant portions of revenues came from its international operations. Hence, it is highly exposed to foreign currency fluctuation. In addition, the risk of strong competition from various big and small industry players such as NCR Corp. (NCR - Analyst Report), Panasonic Corporation and PAR Technology Corporation would also affect MICROS’ profitability moving ahead.
Hence, until the situation ameliorates and a brighter picture appears on the scene, we consider it wise to maintain a sideline stance on MICROS. In the short run, we have a Zacks #3 Rank on the stock, which translates into a short-term ‘Hold’ rating.