Battleground: Macquarie says sell OpenText, Raymond James remains bullish

This morning, Macquarie analyst Gus Papageorgiou downgraded OpenText to Underperform, a sell equivalent rating, citing "poor" returns on capital and a leveraged balance sheet. Commenting on the rating cut and OpenText's balance sheet, Raymond James analyst Steven Li told investors he believes the report's "logic does not hold historically," especially since the company just made the largest acquisition in its history. SELL OPENTEXT: In a research note to investors, Macquarie's Papageorgiou downgraded OpenText to Underperform from Neutral and lowered his price target on the stock to $31.50 from $34.50, saying there are better opportunities elsewhere. Furthermore, the analyst recommended investors consider Constellation Software for exposure to a similar business model, since he believes it has a "much stronger" balance sheet, a "much higher" return on capital, and better growth and cash return prospects. OpenText maintains highly recurring and profitable operations but "poor" returns on capital, and a leveraged balance sheet that limits growth, he contended. LOGIC 'DOES NOT HOLD HISTORICALLY': Commenting on his peer's rating cut, Raymond James' Li told investors in a research note of his own that saying Constellation Software has a "much stronger" balance sheet is "stating the obvious," given that OpenText just made the largest acquisition in its history. "This logic does not hold historically," he argued, noting that in 2013 Constellation Software had a large debt position whereas OpenText was in a net cash position. While Li acknowledged that Constellation Software has a "much higher" return on capital, and may have better growth and cash return prospects, he pointed out that his competitor's report does not highlight the recent turn in organic growth. Li reiterated an Outperform rating and $40 price target on OpenText's shares. PRICE ACTION: In afternoon trading, shares of OpenText have dropped over 2% to $33.12.