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Caution
But can the stock market outperformance continue? It's very unlikely.
The company issued its preliminary results this morning. If you combine...
• a current share price of 465p, which leaves Sage standing on a price to earnings (P/E) ratio of 79 times the earnings per share (EPS) announced today;
• trading comments such as "challenging market environment", and;
• an ongoing growth by synergistic acquisition strategy;
...then investment disappointment is on the cards.
On the face of it, today's results from Sage were impressive. Full-year turnover increased 34% to £412m, pre-tax profits rose 46% to £109m and earnings per share jumped 40% to 5.92p. However, acquisitions played a significant part in the remarkable performance. This year's figures have a partial contribution from the purchase of Best Software, while a full (and drastically improved) performance from Sage's Tetra and Peachtree acquisitions, both bought the year before, also supported the numbers. Needless to say, getting any handle on the underlying growth rate is quite difficult.
Millennium slowdown
Sage, just like every other IT business, was affected by the Millennium slowdown. "The trading environment in 2000... has been difficult", the company declared today, having experienced a surge of Y2K-compliant software orders during the year before. And here are further words of investment caution from the results statement, especially given the highly rated nature of Sage.
"Sales of new software in the second half (six months to Sept 2000) were lower than those in the first half. For the full year, stripping out the effect of acquisitions, sales of new software licences... were broadly in line with 1998/9".
And don't get too excited about the migration of the Sage's customers to e-commerce either: "In the short-term, however, we expect SMEs to remain fairly cautious about investing significant sums in e-business products and services," Sage remarked.
Essentially, the latest results were buoyed by Sage exploiting its existing customer base. The company has made a fine art of cross-selling its software and services to the clients of the newly acquired companies. That's all well and good. But unfortunately, that can only be taken so far with the present customer base. And Sage's share price is currently factoring in plenty of client upgrades, especially to e-commerce products, an area that Sage readily admits is surrounded with some uncertainty.
Longer term, alongside the web-based software, it appears acquisitions are the way forward. However, as Sage grows, so the purchases will become larger and the risk of a management slip-up inevitably increases. The stock market is littered with growth by acquisition disappointments, especially from those who have ventured abroad, as Sage must look to do now.
But none of this unease matters to investors this morning, who seem more concerned with last night's euphoric Nasdaq performance. With Sage shares, moving up 35.5p (8.2%) to 466p this morning, still remaining on a stratospheric rating, the odds of continued long-term investment success look slim.
Where Next?
• Sage Duelling Fools -- Bull or Bear -- which are you?
• Sage discussion board
• Read more about the software industry and get in-depth analysis of Sage in The Motley Fool's Industry Focus 2001. Order before 15th December and get 2 free research updates during 2001!