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Mathew Ingram

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Business intelligence

Mathew Ingram


TORONTO (GlobeinvestorGOLD)—So you've cleaned out all the former telecom superstars, Internet high-fliers, moribund bank holdings and other detritus your portfolio was filled with. But what to put in their place?

Here's one idea: a technology company that has been growing strongly and making money for several years now, and one that shows every sign of being able to do so for some time. The company? Ottawa-based "data mining" company Cognos Inc.

In its latest quarter, Cognos reported earnings of $29.6 million (U.S.) or 33 cents a share, three times the profit it made in the same quarter the last year. Even after excluding a three-cent gain that resulted from a lower tax rate, the software maker reported 30 cents a share in profit, which beat the consensus estimate on Wall Street by 3 cents. Revenue rose 21 per cent to $163-million from $143-million in 2002. But this is more than just a one-quarter story.

Cognos sells what it calls "business intelligence" software; programs that take in all the information a company collects—everything from sales data to dates and times, numbers of employees, and so on—and then allow the company to "crunch" those numbers, or analyze them in several ways. Major Cognos customers (22,000 in 135 countries) include automaker DaimlerChrysler AG, Raytheon Co. and Telus Corp.

Cognos has also been expanding into the public sector, where its sales increased 73 per cent last year. The company signed contracts with the U.S. Department of Defense, the Department of Health and Human Services and the Department of Labor. The U.S. Army Reserve has recently started using Cognos' software to analyze its personnel, training and logistics. Officers can view and monitor their unit's performance data on the Internet.

With the acquisition of enterprise software company Adaytum last year, and the launch of its latest product suite, several industry analysts say that the Ottawa-based company has taken the lead over its main competitor, U.S.-based Business Objects Inc.

Making an impression

"Cognos can now lay claim to the broadest and deepest technology footprint of any publicly traded Analytics vendor," Merrill Lynch analyst Ed Maguire said in a recent report.

Cognos "has taken the lead in the [business intelligence] race," Desjardins Securities said, both in terms of growth and the number and size of contracts signed. Despite this growth, however, the brokerage said that Cognos is trading at a sizeable discount to Business Objects in terms of its price-to-earnings growth (PEG) multiple. As a result, Desjardins recently raised its target for the stock to $29 (U.S.).

Research Capital said that Business Objects "continues to play catch up to Cognos on the product front," and that its analysts believe the Cognos can continue to outperform its competitor over the next year. Analysts at Griffiths McBurney said that with the acquisition of Adaytum, "we believe Cognos is well positioned to be the leader" in the business intelligence market. Although Business Objects has new releases planned, most industry analysts feel Cognos will be able to retain the lead.

One of the only wrinkles in this picture is the fact that Cognos has seen its share price climb over the past six months to the point where it is almost double its 52-week low of $14, set last fall. At 27 times 2003 estimated earnings, it is not exactly cheap. Most of the analysts who follow the company, however, say that it is worth paying a premium for.

"There is always going to be a premium attached to a rare commodity—a growing, profitable Canadian software company," said Paul Bradley, an analyst at Canaccord Capital. Some fund managers say Cognos has gained even more of a following recently as other tech leaders such as ATI Technologies and Geac Computer have stumbled.

All in all, probably not a bad choice if you want some exposure to the tech sector but still want to sleep well.

Mathew Ingram joined The Globe and Mail's online news team in June of 2000, after spending four years as the Western business columnist, based in Calgary.

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