Shareholders of SS&C would probably like to forget the past six months even happened. The stock dropped 25.3% and now trades at $66.39. This might have investors contemplating their next move.
Is there a buying opportunity in SS&C, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is SS&C Not Exciting?
Even though the stock has become cheaper, we’re swiping left on SS&C for now. Here are three reasons why there are better opportunities than SSNC, plus one stock we’d rather own.
1. Shrinking Adjusted Operating Margin
Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.
Looking at the trend in its profitability, SS&C’s adjusted operating margin decreased by 1.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 38.3%.
2. Free Cash Flow Margin Dropping
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, SS&C’s margin dropped by 2.3 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. SS&C’s free cash flow margin for the trailing 12 months was 22.8%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
SS&C historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.8%, somewhat low compared to the best business services companies that consistently pump out 25%+.
Final Judgment
SS&C isn’t a terrible business, but it isn’t one of our picks. Following the recent decline, the stock trades at 9.3× forward P/E (or $66.39 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re fairly confident there are better investments elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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