Progress report: Hedge fund departs, stock plummets

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Last September I blogged about the impact that a New York-based hedge fund called Praesidium Investment Management Co. was having on Progress Software Corp., a Bedford-based provider of business enterprise software.

Praesidium, whose ownership peaked at 9.3 percent of all Progress shares, was demanding several changes at Progress, including the removal of board Chairman Jack Egan (son of Richard Egan, the “E” in EMC Corp.) and the acquisition of an undisclosed company (believed to be Aptean Inc., a privately-held company from Atlanta that’s in the same general business as Progress).

Progress Software, for its part, resisted the moves. It actually did make some recent changes on its board of directors, but none of those changes was the removal of Egan. And it never appeared to make a move to acquire Aptean. I noted at the time that whether Praesidium got its way or not, the fact that it was leaning on Progress was likely a good thing for shareholders.

And it certainly has been. Progress shares were trading at $37 and change at the time of my September post, already up 18 percent on the year and near their all-time high. They subsequently rose as high as $52.36 only six weeks ago before beginning a steady retreat (might it have been due to rumors of Praesidium’s exit?).

Which brings us to Wednesday evening, after the markets had closed for the day. In a Securities and Exchange Commission filing, Praesidium announced that it had liquidated its stake in Progress Software. On Thursday, Progress shares declined 12.6 percent, to $38.81 (and yet, still higher than last September). On Friday they rallied back above $40, in part due to riding a general market rally that saw the Dow bolt ahead 440 points on the strength of an ultra-strong jobs report.

Did Praesidium lose or did it win? Sure, it didn’t get the changes it desired, so it took its toys and went home. But you can bet it sold its stake somewhere near the top of the cycle, while buying somewhere in the low 30s, or even high 20s. It’s tough to beat the pros, folks.

Indeed, that’s what analyst Mark Schappel of Benchmark seemed to be saying, according to MarketWatch, when he lowered his price forecast for Progress to $35 from $42. He said the hedge fund had likely determined that “most of the easy money had been made.”

How about ordinary shareholders? Well, you’re still up 40 percent or so in the past 12 months so maybe it’s time too look under the hood.

Progress’ trailing 12-month price-earnings ratio of 52 is lofty, but its forward PE is a more tame 17, based on expected fiscal 2018 earnings of $2.35 per share. Shares sell for 4.7 times sales (Oracle Corp., the 800-pound gorilla in enterprise software, is at 5.6 times sales).

How about dividends? You know how I love to look at dividends. Progress joined the ranks of dividend payers two years ago, paying out 12.5 cents per share each quarter. In September it raised the payout to 14 cents per share, thus giving shareholders a 12 percent raise. The present yield is 1.2 percent.

Perhaps more importantly, Progress announced at the time of September’s dividend hike that its future policy was to aim to give shareholders 25 percent to 30 percent of its annual cash flow from operations in the form of a dividend. That suggests that investors can expect another hike come September. There is not enough of a history to know whether that hike will be in the form of a double-digit percentage increase.

One red flag: The payout ratio is roughly 66 percent, according to Morningstar. That’s high.

So I guess I’d hold off.

Disclosure: I do not hold shares in Progress Software.

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