Pegasystems (PEGA Quick QuotePEGA - Free Report) is a $5 billion provider of CRM and business process management (BPM) software that enable transaction-intensive organizations to manage a broad array of customer interactions. The company's customers represent a wide range of industries, including banking and financial services, insurance, healthcare management, and telecommunications.

 

I recently bought this mid-cap Software company, originally founded in 1983, because it's trading at just 5 times sales of $1 billion. And if it achieves 8.4% revenue growth this year to $966 million and 12.5% growth next year to $1.1 billion, it will be maintaining a 10.4% CAGR for sales over seven years.  

 

And after an earnings hiccup last year, estimates are rising again as analysts and the company get in sync on the growth trajectory and needed investments in marketing and sales. More on that challenge coming up.

 

Plus, the price chart has been basing in a high & tight flag between $62 and $66 since their strong Q4 report on Feb 20 that delivered top and bottom line beats and raised revenue guidance. And below I share the weekly chart which displays the all-time high close that came after that report and is threatening a bigger break-out to sustained new highs above $66.

 

First, let's review that earnings performance. PEGA gave investors something they really wanted to see: growth in ACV (average contract value). ACV of $570 million was up 23% year-over-year and term license and cloud ACV grew 40% yoy. 

 

This Q4 report represented a 5th consecutive quarter of strong results, as PEGA capitalizes on digital transformation initiatives in large enterprises and expands its cloud application offerings and capabilities. UnitedHealth (UNH Quick QuoteUNH - Free Report) , for instance, relies on PEGA to integrate artificial intelligence tools into their services and data analytics. 

 

On the conference call, Pegasystems CFO Ken Stillwell re-framed the company's 2022 targets for 15-17% yoy revenue growth and 23-25% EBITDA margin. As long as the company operates within their "Rule of 40" (margin + growth = 40%+), it prefers to swap margin for a higher growth rate.

 

Here's that weekly chart with a new bullish formation threatening a bigger move above 2-year resistance at $65-66...

 

 

 

Pegasystems really began its transformation into the world of cloud computing software applications only 5 years after its giant competitor Salesforce (CRM Quick QuoteCRM - Free Report) went public. From Wikipedia...

 

 

 

 

Last week, Pegasystems CEO Alan Trefler was on Jim Cramer's MadMoney TV program on CNBC to talk about the company's years of being under the radar. The host recognized that the company's business process management is far ahead of the competition, but noted that many people aren't aware of the firm.

 

Trefler agreed, noting that his firm is "number one in real time interaction management and business process management" and that "to be trusted by Google speaks to the power of our software." He also highlighted that it's not a situation where a company chooses only CRM or PEGA because "we compliment Salesforce.com in many settings."

 

"I think therein lies the opportunity. For a lot of years we were very, very targeted in terms of who we offered our product to. We weren't very aggressive from a marketing point of view," Trefler told Cramer. "We didn't have close to the number of feet on the street that you need to really engage organizations deeply. We are massively changing that."

 

 

After the Feb report, Wedbush added PEGA to their Best Ideas List (less than 20 names) with an $84 price target. Analyst Steve Koenig described the business growth, challenges and the investment opportunity...

 

 

 

The i-bank's Software analyst team also note PEGA’s 4.6x EV/CY20E revenue multiple as "attractive relative to peers" trading at 6X-7X. They expect continued ACV momentum in FY19 to provide the catalyst for a positive rerating by the market. The Wedbush team predicts that FCF-based valuation should come into focus as investors gain visibility as PEGA’s cloud transition accelerates cash flows in FY20 and beyond.

 

As Pegasystems invests in marketing to compete with the big cloud players, earnings will make a slow recovery. For me, the main metric to watch will be the sales growth -- and a break-out to new all-time highs above $68 won't hurt either. 

 

Disclosure: I own PEGA for the Zacks TAZR Trader portfolio.

 

 

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