Trade idea CNQR 07-09-12
CNQR has 2.5% convertible bonds due 4/15/15 ($288m) trading at 140.375 vs. 66.28. Using 300 credit spread, the model implies 34 vol and 77 delta. The convert trades at 10.9% premium pct and 13.8 points. With a 2.5% coupon and 2.77 years remaining (7 points), this seems attractive and cheap vol for a tech growth stock that trades at 41x PE to $1.66 2013 EPS. The stock is near new all time highs and has developed a cult like following among tech investors and momentum players. Short interest is high at 16% but the borrow is full and rebate is GC. Historical 90 day vol is 37, 250 day vol is 47, and options are not active. I would put the trade on a slightly higher delta of 79, as I believe the current technology spending environment is likely to have a negative effect on the company’s near term earnings. We have seen several software companies guide down such as INFA (down 27% on the day) on 7/6/12.
There aren’t any identifiable catalysts for CNQR other than earnings reports. However, I expected vol. to be elevated as the stock price now factors in very optimistic assumptions for growth. The stock also moves with contact announcements and news about competitors. For example, on 6/4/12, CNQR stock was up 7% on news that it won an e-travel contract with the General Services Administration (GSA). This contract is now being protested by other software companies on the grounds that the contract gives CNQR a monopoly on providing travel management to a government agency.
Palisade’s equity group owned this stock earlier this year but sold in the low-mid 50s earlier in 1Q 2012. I exchanged emails with Lisa Chai who follows the stock and her thoughts are that the company is well positioned but she is not comfortable with the valuation. There has also been a series of insider selling in recent months in the mid-high $60s.
This trade would work well to the downside. If the stock trades down to $50, convert nukes to 115.8 with fair value at 118.6 and crosses par at $39.6 at 32% premium. To the upside, stock trades up to $85, convert nukes to 168.6, or 6.2 points of premium. Given that the convert is 2.5% with 2.78 yrs remaining, bonds should expand by at least 1 point.
The risk of the trade is that the stock doesn’t move or trades in a tight range.
CNQR stock moves for previous 5 earnings reports:
|
5/2/2012 |
2/1/2012 |
11/15/2011 |
7/27/2011 |
5/3/2011 |
|
10.20% |
8.70% |
-2.70% |
-5.50% |
-9.30% |
Company profile
CNQR is a software-as-a-service (Saas) provider focused on corporate travel and expense management. The company’s software allows travelers to book trips from the web on a PC or mobile device, keep track of their plans during the trip, and then submit an expense report after the trip. Currently, CNQR has the best software out there with little competition although big players including Oracle and SAP and looking to enter the market. Most revenues are from the US (85%) and Europe (10%). The company has about 10,000 customers. CNQR sells software though a direct sales force and partnerships with ADP and American Express.
Bull case
CNQR has a first mover advantage, has built a comprehensive software solution, and gained content management expertise that would be difficult for another vendor to quickly replicate. The corporate travel market is large with most expense management still done on excel spreadsheets. The market for automated travel software solution has only penetrated about 10% of the total travel management market. Customers using CNQR software can reduce administrative and processing cost while cutting down reimbursement time. The company is expected to grow sales by 25% and EPS by 30% annually for the next few years.
Bear case
For the past few years, CNQR has had little competition as the market for corporate travel management is relatively new. However, in recent months, SAP and ORCL have focused on improving their software offerings and will focus on selling the new modules to its existing customer base. A global economic slowdown would hurt sales because corporate travel and spending generally slows in this scenario. CNQR stock is highly valued at 41x 2013 EPS so any hiccup will lead to a large fall in the stock.
Credit
CNQR is a strong credit which I estimate to be BB and 300 spread for 2.8 year convert credit. The company ended 3/31/12 with $476m in cash and its only debt being the $288m convertible bonds. The market cap is $3.8B. The company has been a very consistent FCF generator of about $50m per year. Most of its sales are on 1 year subscription contracts that have high rates of renewals (over 90%) so the company can plan its future expenses around sales expectations. Typically, once a customer is set-up on the system, it is already invested and highly unlikely to switch vendors.
Convert characteristics
Lose 2 points on $90 cash takeout on 80 delta
Get last coupon before conversion
Full dividend adjustment