A friend once told me I was very good at picking shares that have already gone up, so he’d probably be horrified to know I like the look of Micro Focus International (LSE: MCRO) – whose shares have almost trebled over the past five years, to 2,064p.
But that includes a 23% fall since May, on the back of the firm’s ongoing merger with Hewlett Packard Enterprise‘s software division (HPE). The problem was an expected 10% fall in HPE’s first-half revenues, which was confirmed last month.
And so far Wednesday we’re looking at a 6% fall after Micro Focus released full-year results, which actually looked fine to me. Revenue of $1,380.7m was bang in the middle of the expected range, with adjusted EBITDA up 3.4% to $651.1m on a constant currency basis.
Healthy cash
Cash generation rose by 24%, diluted adjusted earnings per share put on 19.7%, and the dividend was lifted by 32% to 88.06 cents per share.
On current forecasts I reckon there’s decent value and I see the price dip as a buying opportunity. A P/E that would drop to the 13-15 range over the next couple of years, with dividends around 3.4-3.7%, makes it look like an attractive proposition, especially with a couple more years of earnings growth on the cards coupled with a progressive dividend policy.
It is risky at this point though, and the uncertainty over how the new combined entity is going to perform will most likely fuel continued share price weakness in the coming months. The merger should complete by September, when we’ll hopefully have more clarity. But at the moment, I see Micro Focus as a tentative buy.
Top buy
One stock I’m really not worried about is Barratt Developments (LSE: BDEV), which I consider one of the FTSE 100‘s best bargains right now.
The P/E has plunged over the past few years as earnings have soared, and though the rapid growth phase is coming to and end, we’re still looking at forward multiples of only around 10 for this year and next – and that’s with dividend yields of better than 7% on the cards.
Full-year results from the UK’s biggest housebuilder should be with us on 6 September, and Wednesday’s pre-close update indicates another cracking year.
Including joint ventures, Barratt completed 17,395 homes in the year, the highest level for nine years, and pre-tax profit is expected to beat City forecasts with a 12% rise to around £765m. The firm’s financial targets, set in 2014, of a 20% gross profit margin and a 25% return on capital employed, look like they’re in the bag.
Plenty of cash
Year-end net cash is around £720m, up 22% and ahead of guidance, so there really doesn’t appear to be any worries at all. Despite market fears, partly driven by Brexit, chief executive David Thomas spoke of “a positive mortgage environment and strong consumer demand.”
Despite recovering reasonably well from the post-referendum crash and having quadrupled in five years, at 594p Barratt shares are now down 8% over the past two years, and I really don’t see a rational reason for that reversal.
What we have is a company in a market with a long-term excess of demand over supply, paying one of the best dividends on the market, and whose shares are trading at levels about a third below the FTSE 100’s long-term average. What’s not to love about that?
