Could Micro Focus International plc and this stock be millionaire makers?

This stock has the potential to drive investor returns alongside Micro Focus International plc (LON: MCRO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in digital publisher and media company Future (LSE: FUTR) rose around 5% today on news of the acquisition of US content business Newbay Media LLC. The deal involves an initial payment of £8.62m cash and £1.09m in shares, with a deferred additional payment of up to £3.94 due in January 2019, depending on the future performance of the Newbay business.

Pushing into the USA

Future is well versed in the art of acquisition and integration. Chief executive Zillah Byng-Thorne said: “This deal will be earnings enhancing and drive further organic growth in revenue and profitability in the first full year.” Newbay’s business operates in TV & video, entertainment & educational technology, and music. There’s a clear synergy with Future’s existing media and magazine business, and one of the prime motivations for the firm’s move on Newbay is that the acquisition will expand its reach into the US market. The company also said that Newbay’s business-to-business (B2B) titles will increase revenue diversification and bring B2B expertise to Future’s existing titles, which provides an opportunity to ratchet up revenue across the portfolio.

Future’s trading during the first half of the year was “strong” with last year’s momentum following through. The company’s story is that of a new digital business emerging phoenix-like from the dying embers of the old, as revenues from the paper magazine division continue to decline. Revenue growth from the media division more than offset the decline, with the US putting in a strong performance for the firm. We can see why Newbay is so important to the firm — Future is building on its strengths.

City analysts expect earnings to decline 5% in the year to September 2018 and to rise 8% the year after that. The chart displays a strong uptrend, suggesting the market expects decent operational progress in the years ahead. At today’s share price around 404p, you can pick up the stock on a forward price-to-earnings (P/E) ratio close to 17, which could prove to be an attractive valuation if growth in the US takes off.

Short-term challenges?

I think Future’s growth potential would sit well in a portfolio alongside the turnaround hopes of Micro Focus International (LSE: MCRO). It’s not often that you see a FTSE 100 firm’s share price plummet so quickly, but the software company’s stock sits more than 50% lower than it did just a month ago, due to its well-reported March 19 profit warning. Sales are down because of issues arising from the firm’s gargantuan $9bn acquisition of Hewlett Packard Enterprises’ software business. The integration process is causing Micro Focus indigestion problems.

Sales may be down a bit, but is the market’s reaction to this profit warning extreme? After all, City analysts expect positive earnings growth going forward, and the directors believe the integration challenges are short term with the acquisition thesis remaining intact.

At times like this, the market can be unforgiving and may yet be correct to assign the firm its current low rating of seven times historical earnings. Such uncertainty is the meat and veg of the turnaround investor, but I reckon the first sign that the company has the integration back on track could trigger a valuation re-rating upwards.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »