• The company has beaten estimates in several of the most recent quarters. And it has begun giving guidance again – suggesting business may have become more predictable
• It restructured its sales force. And the company reached out to partners at a recent summit that yielded positive reviews of the new Compuware, according to analysts
• The company is carrying out a $125 million share buyback program – a sign of confidence and often a signal that a stock will advance

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Compuware resolved a lawsuit with IBM (IBM) in a March settlement that will bring $400 million worth of IBM business over four years. The settlement will also save Compuware as much as $30 million a year in expected legal fees – or about eight cents per share in earnings, while removing a big distraction for management.

What’s next

Compuware provides software and services that help other businesses develop and manage their enterprise software applications. Historically Compuware’s strength has been mainframe-oriented software. But that’s yesterday’s market. So Compuware has to shift to software that works in the distributed computing environment.

Will Compuware succeed?

It’s tough to make predictions -- especially about the future, as baseball’s Yogi Berra once quipped. But Compuware insiders don’t have any problem making the call: They have been buying with a passion.

In mid-June, chief executive Peter Karmanos, Jr. plunked down $3 million to buy shares at prices between $6.38 and $6.79, according to Thomson Financial. Around the same time, a director and another manager bought $60,000 worth for prices between $6.95 and $7.38 -- or not too far below recent levels of $7.60.

Valuation

This stock does not appear cheap, at first glance. Compuware trades at about 21 times forward earnings – more than its medium-term projected growth rate of 16.7%. And it has a price to sales ratio of about 2.36.

But that’s lower than competitors like Mercury Interactive (MERQ) and Quest Software (QSFT), which have price to sales ratios of 4.49 and 3.43. And Compuware’s relative valuation looks much better if you consider that it has around $2 per share in cash, or about $797 million, and no debt. In short, when you buy shares today, you are getting the business for $5.60 per share.

The bottom line: Compuware reports results on July 21 and given the volatility in the business, the quarter could bring news that sparks a sell off. On the other hand, insiders don’t buy to trade on near-term results. So I’d follow their lead and buy shares now, and add more if the stock trades off after earnings. Sell-side analysts have a 12-month price target of $10 per share.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.