It’s been a very satisfying year for shareholders of Micro Focus International (LSE: MCRO), with the software and information technology business seeing its operating profit doubling year-on-year and its investors being rewarded with a 50.7% hike in the final dividend, not to mention an 80% share price gain over the year. As if that wasn’t enough to get shareholders grinning all the way to the bank, last month’s announcement of a merger with US giant Hewlett Packard Enterprise’s software business will surely have turned those grins into full-blown smiles.
Big deal
The merger will create one of the world’s largest infrastructure software companies with leading positions across a number of key products. According to Micro Focus, the deal represents a compelling opportunity to create significant value for shareholders by applying its own proven approach to efficient management of mature software products. No doubt the $8.8bn deal with Hewlett Packard Enterprise is terrific news for the Newbury-based company and its existing shareholders and should lead to significant earnings growth over the longer term.
But what about anyone thinking of jumping in? Micro Focus will keep its listing on the London Stock Exchange after the deal is complete, which it expects to be in the third quarter of next year after what is likely to be a lengthy regulatory approval process. Although there are obvious long-term benefits from the merger, it may take some time for these to materialise in terms of earnings growth. Indeed, analysts estimates for the medium term suggest no more than mid-single-digit growth, leaving the shares trading on a pricey P/E rating of 18 after this year’s mammoth rally. It may be wise for new investors to sit on the sidelines for a while and pounce on any significant weakness.
Intertek deserves further inspection
Another high performer within London’s blue chip index this year has been inspection, product testing and certification company Intertek (LSE: ITRK). The company’s shares are up 45% compared to a year ago as revenues and earnings continue their longstanding upward trend. Interim results for the six months to the end of June revealed a strong first half with pre-tax profits up by 15.1% to £172.5m, compared to £149.8m for the same period a year earlier, with a 13.6% rise in revenue to £1.2bn helped by organic growth, acquisitions and foreign exchange movements.
The City is expecting Intertek to continue in the same vein in the coming years, with consensus estimates predicting a 13% rise in earnings for the full year to the end of December, followed by a further 10% improvement for 2017. As with Micro Focus, Intertek is a good long-term buy and certainly deserves further inspection (pun intended), but following this year’s share price rally, the shares look expensive at 23 times forecast earnings. I would wait for the next big share price retracement before piling-in.
