QAD reported a respectable quarter last night, delivering in line total revenue and GAAP EPS above estimates. However, management maintained guidance in its seasonally strong F4Q, implying a slight fade in expectations. Importantly, the company continues to notch deals for its on-demand business, particularly from existing on-demand customers rolling out the solution to new sites or divisions.

QAD’s shares are up approximately 38% during the past four months (vs. ≈8% for the broader software industry), which we attribute in large part to a small cap value “catch-up trade” with the rest of the software sector. We continue to believe the stock has plenty of room to run, particularly given that it trades for .8 times our forward revenue estimates, well below what we believe a software vendor with comparable margins should trade for, even for a thin trader.

However, it’s our belief that the catalyst to a reversion to a more normal valuation range is likely to be software growth (license plus subscription), several quarters of meeting and beating Street revenue and earnings estimates in the current environment, and an accelerated growth outlook if the industrial manufacturing economy improves. While QAD has yet to deliver on these items, we still believe the stock is mispriced, which is why we rate this company a Buy and why we are raising our price target to $20 from $15.

There were six deals over $1 million in the quarter, consistent with a year ago; automotive made up 27% of total sales, in line with historical norms; and on-demand continues to make-up 25% of the total sales funnel, though the funnel is down 5% from last year at this time.

Management guided the January quarter in line with our estimates, expecting total revenue of $69 million, implying 4% annual growth. GAAP EPS is expected at $0.15 blended ($0.16/$0.13 for A/B shares), which is spot on with our numbers, so we are leaving our estimates unchanged for F4Q14 and beyond