American Software Stock: Cloud Player Showing Breakouts with More to Come

American Software Stock
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Make American Software Great Again

In my search for innovative cloud plays, my search yielded American Software, Inc. (NASDAQ:AMSWA), a company formed in 1970 but only recently showing promise.

AMSWA stock is up 40% this year, including a 21% move during the past month after staging a technical breakout at $13.00, with more to come.

Chart courtesy of StockCharts.com

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An intriguing aspect of American Software stock is the company’s focus on developing cloud-based applications to help companies in complex supply chain and enterprise software solutions.

American Software’s clients are broadly based, including companies in retail, apparel and footwear, consumer packaged goods, chemicals, oil and gas, life sciences, telecommunications, consumer electronics, industrial, and manufacturing.

Think about the intricacies of global supply chains and how companies demand solutions that are not always available from internal sources. That’s where American Software comes in.

The Bull Case for AMSWA Stock

Revenues have largely been flat over the past five fiscal years, between $100.0 million and $114.0 million. (Source: “American Software, Inc. (AMSWA),” Yahoo! Finance, last accessed July 7, 2018.)

Fiscal Year Revenue (Millions) Growth
2014 $100.6
2015 $102.9 2.3%
2016 $113.9 10.7%
2017 $106.3 -6.7%
2018 $112.7 6.0%

But while American Software has failed to deliver stronger growth, there are encouraging signs that revenues could finally break higher.

For fiscal-year 2019, revenue growth is predicted to rise to 9.6%—to a record $123.5 million—followed by 10% growth—to $135.9 million—in fiscal-year 2020.

Gross earnings increased at a higher rate than revenues in fiscal-year 2016 and fiscal-year 2018, which indicates good management of expenses.

Fiscal Year Gross Earnings Growth
2015 -7.7%
2016 14.2%
2017 -8.8%
2018 15.8%

Gross margins are around 50%, which is subpar for a software company, but the fact is, American Software has produced profits in 17 straight years.

What American Software needs to do is to deliver consistent earnings growth, which has happened in only two of the last four years.

On a generally accepted accounting principles (GAPP)-adjusted basis, the company is expected to increase earnings per share (EPS) by 27.5%—to $0.51 per diluted share—in fiscal-year 2019, versus $0.40 per diluted share in fiscal-year 2018.

The company is expected to follow this with growth of 23.5%—to $0.63 per diluted share—in fiscal-year 2020.

Fiscal Year GAAP Diluted EPS
2014 $0.37
2015 $0.28
2016 $0.35
2017 $0.49
2018 $0.40

American Software has been absent of debt in five straight years, and it generates positive free cash flow (FCF).

While FCF is positive, there was growth only in fiscal-year 2015. FCF declined 60.8% in fiscal-year 2018. The higher expected earnings flow should help drive FCF higher in fiscal-years 2019 and 2020.

Fiscal Year Free Cash Flow (Millions) Growth
2014 $17.1
2015 $16.6 -3.0%
2016 $16.8 1.0%
2017 $13.8 -17.7%
2018 $5.4 -60.8%

Analyst Take

American Software is a small company, but AMSWA stock is held by 151 institutions. There has also been decent insider buying, with a net 50,106 common shares added during the past six months, which is a positive signal.

American Software stock trades at 25.8-times its fiscal-year 2020 EPS, and it has a price/earnings to growth (PEG) ratio of 1.8. Although that isn’t cheap, for a small emerging technology growth stock, it doesn’t look overpriced and is worth a look.