NEW YORK (CNN/Money) - Barra Inc., a provider of financial risk management software, like most of its peers in the information services sector, is hostage to the current market sentiment. But one portfolio manager says investors may be missing out on an attractive investment prospect.

Near term, analysts say Barra is stuck in survival mode, particularly as long as the stock market remains handcuffed by economic and corporate concerns, and businesses curtail spending on information technology.

But Kenneth Broad, portfolio manager with Transamerica Investment Management, sees other factors working in the company's favor longer term, such as the growing demand for risk management in a volatile market, its niche market dominance and strong cash flow.

"Current earnings are a bit depressed because of the current spending environment," Broad said. "But the stock is extremely attractive, trading at about 17 times forward earnings estimates of roughly $1.80. This translates into roughly a 6 percent free cash flow yield. We love businesses that generate scads of free cash flow."

The Berkeley, Calif.-based provider of portfolio and enterprise risk management services has suffered as the malaise in the financial services sector stymies business growth. Barra last month posted first-quarter profit lower than a year earlier and warned of flat earnings for 2002.

WR Hambrecht downgraded the stock to "market perform from a "buy" following Barra's warning.

"Currently, the selling environment is not as good as it could be. Buy-side institutions are closely watching how they spend their budgets, especially in information technology," said Stephen Laws, analyst with WR Hambrecht. "But long term, Barra is clearly a leader in its space, and benefits from steady cash flow,"

Laws backs Broad's assessment of the stock as a good long-term play.

"As IT (information technology) spending picks up and as the risk profile of a portfolio in a fund increases, Barra will benefit from that. But in the near term, I don't see a pick-up in spending in information technology solutions. That was the main reason for our downgrade of the stock," Laws added.

More from Kenneth Broad on why he's promoting the stock:

It's no surprise that given the current economic and business downturn, and market pessimism, the stock of a financial adviser such as Barra has dropped about 45 percent off its 52-week high. You're backing the company, but your fund is also a heavy institutional investor in the stock. Why should investors pay attention to Barra?

Barra has all the operating and financial characteristics that we seek. It operates in a defensible niche, with high barriers to entry.

It is a subscription business, so it actually has negative working capital requirements (i.e. working capital as a source of funds) and very low capital expenditure requirements.

As a result, Barra (BARZ: up $0.17 to $33.85, Research, Estimates) generates very high returns on invested capital and a lot of free cash flow relative to reported net income.

I also like the fact that the current CEO has been divesting non-core operations, including a hedge-fund business, and focusing on enhancing profitability in the core business. As a result of the divestitures, Barra has roughly $11 a share, sitting in net cash on the balance sheet. That's over one-third of the company's current market value.

Who are its competitors and what makes it a 'winner' in the sector?

The company competes with other niche providers like Wilshire, but Barra has been and remains the leader in its niche of equity risk management.

What's your take on the sector's performance?

The sector is under a bit of pressure as enterprises reduce their spending for information services. But the subscription nature of Barra's business leads to less volatility in their results than many other businesses serving the same customer base.

One of the characteristics we seek is "buffered" business models that should prove to be resilient regardless of the economic environment, and Barra is a good example of this.

How do you value the stock?

If you strip out the cash, their core business is trading at 12 to 13 times earnings, or nearly an 8 percent free cash flow yield. We think that on an intrinsic value basis the business is worth at least twice what is reflected in the current $30 stock price.

What about the stock's longer-term outlook?

Long-term growth potential should be in the double-digits (on a percentage basis) as Barra leverages incremental revenues into even faster bottom-line growth.

Businesses with strong free cash flow have the ability to even further enhance shareholder value via large and accretive share repurchase programs, which augments earnings-per-share and free cashflow per share growth.

Management repurchased 4.25 percent of the outstanding stock in the last quarter alone, and the stock is even more attractively valued now. We think their aggressive share repurchase program will prove to be highly accretive to shareholder value at current levels.

Any risks unique to the stock?

Barra's main customer base is institutional investors and an extended, secular bear market would be detrimental.

What is your financial interest in the stock?

The fund I co-manage, Transamerica Premier Growth Opportunities Fund, has a 5.3 percent weighting in Barra, making it a top-ten holding.

Additionally, my firm Transamerica Investment Management LLC, is the single largest institutional shareholder with roughly 1.7 million shares, or about 8 percent of basic shares outstanding.

I do not directly own the stock personally, but rather indirectly through the large investment I have in my Growth Opportunities Fund.

Any final thoughts?

Cash is King!  

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