Record giving to non-profits boosting US software company Blackbaud
NEW YORK – Big data is starting to make its way down to even the smallest non-profit, and fund managers are finding a way to buy in.
Among their favorite targets: US software provider Blackbaud Inc (BLKB.O), 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 US 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 (HDPSX.O) 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 (CRM.N), Oracle Corp (ORCL.N) and MicroStrategy Inc (MSTR.O) 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 (TYL.N), 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 .SPX down approximately 2.5 percent for the year to date, the US 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.
“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.
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. -Reuters