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 Among their favorite targets: U.S. software provider Blackbaud Inc,
whose cloud-based software is a favorite among non-profits looking
to cash in on the record levels of charitable giving in the United
States.
A total of 45 U.S. mutual funds added shares of the Charleston,
South Carolina-based company to their portfolios between June and
August, double the number from the previous quarter, according to
the most recent data from Morningstar. Those purchases by fund
managers are one reason why shares of the company are up nearly 40
percent for the year amid a down market and trade at a
price-to-earnings ratio five times that of the broad S&P 500.
Analysts say that the $2.9 billion market cap company is riding two
trends: an economic recovery that has disproportionately rewarded
affluent households that contribute the bulk of donations, and the
popularity of fundraisers such as the "Ice Bucket Challenge" that
are widely shared on social media.
"Now with Facebook and digital fundraising, you need technological
expertise, even if you're a smaller non-profit," said Eric Marshall,
whose $2 billion Hodges Small Cap Fund has been adding to its
position in the company, currently worth $28.4 million, according to
Thomson Reuters data.
At the same time, products offered by larger competitors such as
Salesforce.com Inc, Oracle Corp and MicroStrategy Inc are often poor
fits for the smaller non-profits that are the company's target
market, he said. Blackbaud, by comparison, offers Web-based
analytics software that can help organizations communicate with
donors, manage volunteers, process payments, and identify future
prospects along with a recommendation for how much an organization
should ask them to give.
"This is an under-the-radar provider of services to an area of the
market that doesn't get a lot of attention, but once you win
customers they are very sticky," he said, likening its potential to
that of Tyler Technologies Inc, whose shares have gained 700 percent
over the last five years as its software to manage such local
government operations as county records and traffic tickets caught
on.
SLOWING BULL MARKET
Yet while Blackbaud's shares are trading near the record high of
$63.97 they hit on Aug. 18, the company's future prospects are
dependent in part on the same bull market that allowed Americans to
donate a record $358.2 billion in 2014, a 7.1 percent increase from
the year before, according to a report by the Giving Institute.
Donations by individuals make up 72 percent of total giving in the
United States, with the level of donations rising about one-third as
fast as the stock market, the organization said.
With the benchmark Standard & Poor's 500 index down approximately
2.5 percent for the year to date, the U.S. stock market is on track
to post its first annual loss after dividends since 2008 and halt a
rally that has returned 72.8 percent over the last five years alone.
That could dampen the size of donations from high-net worth
households, which contribute as much as two-thirds of all funds
given to non-profits in a given year, according to the Giving
Institute.
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"Giving tends to track the overall economy, and any type of economic
sensitivity would be something that (Blackbaud) would be impacted
by," said John Rizzuto of SunTrust Robinson Humphrey, who covers the
company.
Despite those concerns, Rizzuto has a buy rating on the shares, in
part because he expects the company's "aggressive" growth plans to
bear fruit even if the stock market stalls.
Overall, four analysts tracked by Thomson Reuters follow the
company, and their recommendations are evenly split between "buy"
and "neutral." The average target price among them is $64.50, a
slightly figure higher than the record high for the stock. The most
recent, Kevin Liu of B. Riley & Co, initiated coverage of the
company with a "neutral" rating and a target price of $66 on
Tuesday. He did not respond to a call for comment.
GROWTH PLANS
The company, which did not respond to requests for comment, told
analysts in July that it expects to expand its total addressable
market to $6.5 billion from its current $5 billion, largely through
acquisitions. It reports its next earnings results on Oct. 27.
Within the last 16 months, the company has spent $160 million to
acquire MicroEdge, which developed software mostly used by
deep-pocketed foundations, $190 million on Smart Tuition, a company
that made payments software used by private K-12 private schools,
and $35 million on Whipple Hill Communications, which made
cloud-based applications used by private schools.
The company has a strong track record of buying higher-margin
businesses while it expands its target market, said Thomas Roderick,
an analyst at Stifel Nicolaus & Company Inc who has a "buy" rating
on its shares. With the purchase of Smart Tuition, for example, the
company now has an "end-to-end" solution for K-12 private schools
that ranges from accounting packages aimed at Dioceses to financial
aid assessment tools to collection systems for tuition and
delinquent payments, he said.
At the same time, the company's strong balance sheet and growth in
an area of the economy that many investors are not exposed to could
make it an acquisitions target, Rizzuto said.
"As much as there is an 800-lb gorilla in the nonprofit space,
that's what Blackbaud is," he said.
(Reporting by David Randall; Editing by Lisa Shumaker)
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