Software firm Sage has delivered another impressive set of numbers. Its shares are much cheaper than they used to be, but are they cheap enough?
Sage Group's (LSE: SGE) half-year results for the six months to March 31 were surprisingly good -- even for Sage, which over the past few years has continued to deliver solid growth in sales revenues, earnings per share, and dividends.
It's the reason that the company is sitting squarely on my 'watch list' these days. It wouldn't have been there a couple of years ago, I concede. Having had my fingers burned in the dotcom crash, I've been wary of software companies ever since. And Sage, let's face it, is that most unusual of software companies -- a homegrown British success story.
But times change. And to loosely paraphrase John Maynard Keynes, when the facts change, only a fool pretends they haven't. (Note the lower-case ‘f’.) Had I put my money into Sage instead of Lloyds Banking (LSE: LLOY) and BT (LSE: BT-A), I'd now have a great deal more of it left.
The power of a brand
Newcastle-based Sage sells accounting and enterprise management software to small and medium-sized businesses. It won't like me for saying this, but part of its success lies in its roots in accounting software, which has seen a generation of accountants -- now promoted to finance directors in charge of IT budgets -- prefer to stick to a brand they know and trust.
Back in the mainframe era, the saying went that no one was ever fired for buying IBM. Roll the clock forward to today, and epithet fits Sage just as neatly. The software isn't the whizziest in the world -- and sales are reassuringly global -- but it's software that's robust, reliable, and rich in accounting functionality.
Sales, profits and dividends are up
And it's certainly difficult to quibble with the company's half-year results. Revenues rose by 17% to £748 million, helped -- admittedly -- by favourable currency movements. Pre-tax profits rose by 14%. Operating cash flow was strong at £187 million, and the company announced yet another increase in the interim dividend, this time to 2.5 pence per share.
That said, not everything in the garden is rosy. Strip out the effect of currency movements, and sales are slightly down. Well, in these recessionary times, there’s a surprise. As a result, there have been redundancies to bring the cost base in line with economic conditions -- another development that’s far from unexpected. And "current market conditions will continue through the remainder of the financial year," warns the company. It would be a brave person who'd say anything different, frankly.
In my view, the positives vastly outweigh the negatives. Revenues don't just come from new sales: existing customers also pay a subscription for maintenance and support services -- indeed, Sage fields a whopping 40,000 customer support calls per day from its 5.8 million customers worldwide. And despite the downturn, renewal rates of support contracts remained steady at 81%, with what the company describes as 'continued strength' in its premium support products.
What's more, Sage has moved robustly deal with that downturn. In the half-year in question, the company had achieved annualised cost savings of £49 million, with about 700 jobs being eliminated throughout the period, 200 of them since the start of the year. Taken together, the cost savings add up to about 4% of the cost base, roughly equal to the underlying fall in non-currency-adjusted sales.
Is it cheap enough?
But is Sage a 'buy'? For most of the past seven years this FTSE 100 constituent company has traded comfortably in the range of 125p -- 250p, well down from the 900p+ it reached as a dotcom darling. But even so, it isn't cheap: rising 6% to 196p on the back of these results, the P/E is a hefty 14 or so. In other words, Sage might be a good business, but it isn't a cheap business.
At that valuation, I reckon that there are better homes for my money -- such as Tesco (LSE: TSCO), which is also on my watch list, trades on a broadly similar P/E and dividend yield, and of late has shown (from my point of view) interesting signs of weakness. Over the past month, for instance, Tesco's share price has underperformed the FTSE 100 by almost 5%, which is almost unheard of.
They might be very different businesses, but on present form, I'd sooner be buying into Tesco while it's relatively cheap, rather than Sage while it remains a little too pricey for my tastes.
More from Malcolm Wheatley:
Malcolm owns shares in Lloyds Banking and BT. Several years ago, he undertook some paid writing work for Sage.
