RBC Capital Markets upgraded its rating on shares of MICROS Systems, Inc. (NASDAQ: MCRS) to outperform from sector perform, as the company's next phase of growth emerged. The brokerage raised its price target to $58 from $50, as it roll-forward valuation framework to calendar 2012.
There are three reasons for our upgrade: we believe MICROS is in the early stages of providing more consumer-facing technologies in restaurants and hotels which should drive incremental growth; Simphony platform, recently rolled out by Starbucks Corp. (NASDAQ: SBUX), could drive an upgrade cycle in the Restaurant vertical; and large cash position and underlevered balance sheet creates optionality for M&A, said Daniel Perlin, an analyst at RBC Capital.
After decades of providing ERP systems to restaurants and hotels, Perlin believes MICROS Systems is increasingly focused on expanding into more consumer-facing technologies. For the Hotel vertical Perlin understands MICROS Systems is working with Google Inc. (NASDAQ: GOOG) to develop online reservations integrated into Google maps.
Within the Restaurant vertical Perlin believes MICROS Systems is focused on developing new mobile applications designed to improve the consumer experience, while tying directly into its ERP system.
Although Simphony, which is MICROS's first SaaS offering, has been in the market for several years, only recently has the product been rolled out on a commercial scale with the recent launch of Starbucks (now in about 7,500 locations in the US and Canada).
Perlin estimates the total revenue opportunity is equal to $370 million in software for Quick Service and Table Service restaurants and an additional $1.3 billion for hardware, assuming they upgrade 60 percent of their existing client locations. In addition, Perlin estimates hosting fee revenues could equal about $400 million.
In our opinion, there remain several large hotel clients that could meaningfully drive revenue and earnings higher over the coming years if MICROS Systems is able to win their business. By our estimation any one of these clients could generate incremental annual revenues ranging from $5 million to $38 million, said Perlin.
Perlin believes the valuation multiple historically afforded MICROS Systems could slowly expand over time as the market begins to appreciate the company’s new consumer-facing products (which are more software heavy), potentially large upgrade cycle opportunity for Simphony, and possible large new client wins.
As such Perlin believes the shares are deserving of a 22 times of forward cash adjusted price-to-earnings multiple, which he applies to his calendar 2012 cash adjusted (removed cash interest income) of $2.20 and then add the projected $10 in cash per share to arrive at his new $58 target price.
MICROS Systems stock is trading up 3.13 percent at $49.08 on the NASDAQ Stock Market at 9:32 am EDT. The stock traded between $30.96 and $49.77 during the past 52 weeks.