JPMorgan Comments on Road Trip with CA Management

Analyst John Difucci:
We marketed with CA management recently, and while there was nothing new that would change our positive opinion of the shares, we offer the following that we believe should be of interest to investors:

• Macro effects minimal so far. While CFO Nancy Cooper acknowledged the deteriorating macro environment, she indicated that CA has yet to see much impact on its business as sales cycles remain within normal ranges for now.

• Restructuring progress. This management team has been in the process of improving the operating efficiency of CA for a couple of years now. Management believes that it is about half way to achieving the level of efficiency it believes is appropriate for CA.

• Future cash flow improvements. We believe CA can grow its cash flow even in a recessionary environment through improved expense efficiencies realized through recent restructuring efforts, reduced cash restructuring expenses next year, and eventual opportunities in regards to cash taxes. Cash to be collected over the next year has increased in each of the last 4 Qs after 10 Qs of either declining (8) or remaining flat (2).

• We continue to rate CA Overweight with a $28 price target based on our DCF. We view CA as among the best fundamental plays in Software, with recurring maintenance accounting for about 70% of total revenue yielding a defensible bottom line, improving operations, and with the stock trading at about half of what we estimate to be the value of its maintenance stream alone (5.1x EV/Mtn is equivalent to a stock price of about $29).