Shares in set top box manufacturer, Pace (LSE: PIC), have fallen by 2% today after the company released its first half results. Although pretax profit increased from $72m in the first half of 2014 to $85m in the first half of the current year, it appears as though the update failed to excite investors in the company despite it being a time of great change for Pace.
Indeed, Pace’s $1.4bn merger with Arris is still very much on track and, while Pace concentrates on performing as a standalone entity ahead of the merger (which is due to complete in the fourth quarter of the year), Pace will not pay further dividends this year. This, though, is not hugely significant since Pace only yielded around 1.2% at the present time.
Of course, Pace’s share price has declined considerably since the merger was announced earlier this year. Its shares have fallen from 450p in April to their current level of 355p, which makes them hugely appealing at the present time since they trade on a price to earnings (P/E) ratio of just 9.1.
Furthermore, the deal with Arris seems to make sense and should create considerable efficiencies and synergies in the combined entity, with Arris having a strong reputation as a broadband equipment manufacturer. And, with Arris’ shares trading on a price to earnings growth (PEG) ratio of just 0.6, it appears to offer growth at a very reasonable price. As such, the 0.1455 shares that investors in Pace will receive in the new merged company in return for each of their Pace shares (plus 132.5p in cash) appears to be a very attractive offer.
Meanwhile, Imagination Tech (LSE: IMG) also has considerable capital gain potential. That’s because it is forecast to increase its bottom line by 6% this year, followed by a further rise in earnings of 23% next year. This would come after three years of falling profitability and, as such, investor sentiment could improve dramatically if Imagination Tech were able to deliver on its future guidance. And, with its shares trading on a PEG ratio of just 1.2, they appear to offer considerable scope for an upward rerating over the medium to long term.
Still in the tech sector, engineering consultancy firm, IQE (LSE: IQE), is due to post a rise in its net profit of 11% next year. This would come after a three year period in which the company’s bottom line has risen at an annualised rate of 19% (if the current year’s expectations are met). Despite this, IQE’s share price has been rather subdued in the last three years, rising by just 1% during the period. As a result, IQE trades on a PEG ratio of just 0.8 and could start to see an upward rerating come through over the medium term.
As to whether Pace, Imagination Tech or IQE is the best buy, all three stocks offer good value for money and have bright futures. However, Pace seems to be the cheapest of the three and, while its future is somewhat uncertain due to its planned merger with Arris, for long-term investors it seems to offer the greatest upside potential.
