This tech company has been around for 35 years but it's still growing quickly.
I first bought into FTSE 250 company Micro Focus (LSE: MCRO) back in 1985. The shares had spectacularly crashed in the wake of some long-forgotten bad news, and I decided that they were an interesting recovery play. The company duly obliged, and I sold out in the mid-1990s.
On and off, I've kept a loose eye on the business ever since. It wasn't long, for instance, before I regretted selling when I did. As the year 2000 approached, and businesses began to worry about the Millennium Bug, they suddenly realised that they needed to re-code thousands of applications written in COBOL, a legacy programming language. Their COBOL vendor of choice? Micro Focus, one of the few companies to continue to offer COBOL resources.
Booming business
Micro Focus continues to sell COBOL programming tools to this day -- and many other IT products and services as well.
It has 15,000 customers and one million licensed users, and a customer base that includes over 70 of the Fortune Global 100. Simply put, the niche it has carved for itself is one of helping large companies to improve their IT productivity by allowing older applications to take advantage of modern lower-cost platforms such as Linux or Windows.
It's a profitable business, as the company's final results for the year ending 30 April 2009 -- just out -- amply illustrate. Here's a flavour. Sales revenues up 20%. Profit before tax up 31%. Generated cash from continuing operations up 15%. Earnings per share up 29%. Dividend up 20%. Not much wrong with those numbers.
Nor are these results a flash in the pan. While some years have admittedly been better than others, the Micro Focus success story goes back years. A series of acquisitions, too, have helped to diversify the company's product line. Even as it cheekily planned a 50th birthday celebration for the COBOL language back in May, the company was raising its bid for Borland, yet another mid-tier IT vendor to be brought into the Micro Focus fold.
What's not to like?
But success stories comes at a price -- in this case, the share price. Most shares have tanked since the onset of recession. Not those of Micro Focus, where strong results and high-profile acquisitions have kept investor interest high. As this chart shows, trading briefly below 100 pence back in 2006, Micro Focus topped 400 pence earlier this year before then slipping back. And this, remember, is a 35-year old FTSE 250 business -- not some AIM-listed get-rich-quick oil or gold explorer.
Micro Focus also has a counter-recession aspect to it, as well. When business conditions are tough, its corporate customers will want to extend the life of their old business applications with Micro Focus products, rather than throw them out and buy something newer and sexier. For now, that's good news -- but in two or three years' time, growth might tail off. The trouble is, people have been predicting that for years. Including me.
I also don't like the fact that Micro Focus reports its results in U.S. dollars, despite being headquartered in leafy Newbury. It's in good company -- oil giant BP (LSE: BP), for instance, does exactly the same -- but it does mean that the business's financial results (not to mention investors' dividends) are exposed to currency fluctuations. Given the gyrations we've seen in the dollar-sterling exchange rate in the last twelve months, the potential for problems is obvious.
Is it cheap?
All of which raises the question: despite its soaring share price, is Micro Focus a share to buy? I think so -- and here's why.
First, management's record in growing the business, and its dividends, is good. Micro Focus yields 3% on a PE ratio of 12.5, rather lower than the 17 times it was priced at three years ago, when the yield was just 2.4%. A P/E of 17 might have been a stretch, but there's nothing too demanding in a P/E of 12 or so.
But second, for a business like Micro Focus, the PEG ratio is arguably a better tool, providing -- as it does -- an insight into potential growth share bargains.
As Alan Oscroft recently pointed out, Jim Slater, in his Zulu Principle, uses a PEG of 0.7 as a cut-off point, and regards anything lower than that as worthy of further investigation. Micro Focus' PEG ratio? A tasty 0.4, well into 'further investigation' territory.
Malcolm Wheatley owns shares in BP.
