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ByKen Shreve, Portfolio Manager

Makers of enterprise software continue to do well because their products and services help Corporate America streamline operations and run more efficiently. It’s a fragmented industry, too, which should make it a hotbed for more mergers-and-acquisitions activity in the future.

Epicor Software is a small-cap stock in this group with market capitalization of around $600 million and an average daily trading volume of around 325,000 shares. Epicor hasn’t been mentioned as a takeover candidate, but some former competitors have been acquired — for instance, Cognos was bought by IBM in 2008, and Hyperion Solutions was snapped up by Oracle in 2007.

Among enterprise-software makers, Epicor is a niche player that caters to midmarket firms in the manufacturing, distribution, retail, hospitality and service industries. The company’s software helps clients with customer-relationship management (CRM), financial reporting and supply-chain management.

Founded in 1984 as Advanced Business Microsystems, the company changed its name to Platinum Software in 1992. At the time, it was a provider of financial-accounting systems, but the company eventually evolved into an end-to-end provider of enterprise software solutions. It changed its name to Epicor Software in 1999.

Epicor pursued a growth-through acquisition strategy early in its business, with a series of acquisitions from 2002 to 2008, but activity has quieted down in recent years.

Given these numerous transformations, it’s probably an understatement to say Epicor’s business has changed over the years. On the surface this might seem like a yellow flag, but the company has clearly found its footing and is well focused.

In a recent piece of positive news, earlier this month U.K.-based Brice Baker Group, a global manufacturer and distributor of silos and ancillary products and services, selected Epicor’s next-generation enterprise resource planning (ERP) solution — Epicor 9. The system will help Brice Baker streamline its operations across sales, manufacturing, production and finance.

Epicor isn’t a high-octane, fast-growing software maker, but the company has several positive qualities from a fundamental and technical perspective. Fundamentally it’s shown steady growth in recent quarters, and future growth prospects look pretty good.

Most recently, in late October Epicor reported an impressive third quarter, showing accelerating growth vs. the second quarter both in earnings and sales. The company’s third-quarter profit rose 38% year over year to 18 cents a share, up from 18% growth in the second quarter, and third-quarter sales — up 16% to $114.6 million — compare with 9% growth in the prior quarter. It’s always good to see earnings and sales growth accelerating, because this usually indicates increasing demand for a company’s products.

Commenting on the results, CEO George Klaus said: “Epicor is selling into more markets than ever before, and our superior products are driving market share gains. “As we look forward into the fourth quarter and 2011, our pipelines support continued momentum and currently support our belief that our 2010 fourth quarter will be one of the strongest software revenue quarters in Epicor’s history.”

The company ended the quarter with cash and cash equivalents of $113.1 million. Long-term debt currently stands at $251.7 million. That’s on the high side, but Epicor has managed its debt well in order to expand its business, and it’s starting to pay off.

For the full year, the Thomson Reuters consensus estimate is for profit of 61 cents a share, which would be a 17% increase from 2009. In 2011, the consensus estimate is for profit of 70 cents a share.

The Chart

I would not be a buyer of this stock until it breaks out with conviction over its recent high of $10.27.

Yes, it may seem counterintuitive to wait for a stock to rise to a certain price before buying, but when you’re dealing with a potential breakout situation, this is the best strategy. If you buy too early, there’s the risk the stock will never reach its breakout point. Alternatively, the breakout could happen, but in light volume — which wouldn’t bode well for a sustained upward move. It’s always good to see heavy volume at a breakout, because a prior high can often be resistance for a stock. A big surge in trading volume at a breakout is usually enough to overcome selling pressure.

When major stock indices started to fall apart in late April, Epicor followed the market lower. Between late April and August, shares corrected about 42% before buyers started to come back in. Epicor started to head higher, and its weekly chart shows several weekly gains in September and October in which volume was above average, a hint that institutional investors were fueling the move. It’s always good to see a stock building on the right side of a base.

Epicor’s 20-day moving average has turned into resistance in recent days — not the best of signs — but I still believe a breakout above $10.27 is within reach. As a stock readies itself for a potential breakout, it’s common to see the last remaining sellers get shaken out, and that’s what’s been happening in Epicor for about the past four weeks.

Shares of Epicor closed Thursday at $9.40, down 1.3%. Volume was very light at 157,000 shares.