Is EMIS plc a falling knife to catch after today’s 20% slump?

Could EMIS plc (LON: EMIS) deliver a strong recovery?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Connected healthcare and services provider EMIS (LSE: EMIS) has fallen by as much as 20% today after it announced the results of a review of customer and product support processes.

The review has identified a failure to meet certain service levels and reporting levels with NHS Digital. It relates to the company’s web product for GPs in England, with the findings having been fully disclosed to NHS Digital.

The financial impact of the issue is still unclear, as it has only just come to light. However, the company estimates that it could be in the upper single-digits of millions of pounds. With the firm having made a pre-tax profit of £25m in 2016, this is a sizeable amount for the business.

Improving trading

As well as the results of its review, EMIS also released a trading update for the 2017 financial year on Thursday. The company’s performance has been in line with expectations, excluding the potential losses from the aforementioned review. Full-year revenue was slightly ahead of the comparative period as it benefitted from growing recurring revenue, strong market shares and good momentum in its order books and pipelines.

Furthermore, the internal reorganisation programme has been completed, with a renewed focus on improving day to day operational management. With the company having a balance sheet which includes £14m of net cash, it appears to be in sound financial shape for the long run.

Recovery potential

With EMIS trading on a price-to-earnings (P/E) ratio of 16.3 even after today’s share price fall, its valuation appears to be high. Certainly, the business has growth potential, but this may be scaled back over the near term by the outcome of the review. As such, it may not be able to sustain its current valuation over the coming months, since investors may reduce their growth expectations for the business. This means that now may not be the right time to buy it for the long term.

Improving outlook

Also operating in the software and computer services industry is Iomart (LSE: IOM). The cloud specialist has a solid track record of earnings growth, with its bottom line rising at an annualised rate of 15% during the last five years. More growth is set to be delivered over the next couple of years, with the company’s bottom line due to rise by 13% next year, and by 9% in the following year.

With Iomart trading on a price-to-earnings growth (PEG) ratio of 1.4, it seems to offer excellent value for money. The company appears to be making encouraging progress with its strategy and when its consistent growth prospects are factored in, there could be scope for a higher rating over the medium term.

With dividends per share forecast to grow by 28% during the next two years, the stock has a forward yield of around 2.2%. This is from a dividend which is expected to be covered 2.6 times by profit. As such, more growth in shareholder payouts could be ahead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Emis Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Dividend Shares

These 3 FTSE 250 stocks offer me the highest dividend yields, but should I buy?

Jon Smith considers FTSE 250 shares with a very high yield, but questions whether the income is going to be…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Is FTSE 100 takeover target DS Smith a great buy?

A mega-merger between FTSE 100 giants DS Smith and Mondi has the City abuzz. But is there any value in…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

The WPP share price dips as profits fall. Here’s why it could be a top dividend buy

I'm starting to think the WPP share price undervalues the stock, especially if the long-term dividend outlook comes good.

Read more »

Black father and two young daughters dancing at home
Investing Articles

A £3K investment buys me 632 shares in 2 stocks for a second income!

This Fool explains how a second income is possible through dividend-paying stocks and details two picks that could help her.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Here’s what these results tell me about the Lloyds share price

A policy of progressive shareholder returns, including big dividend yields, makes the Lloyds share price look super cheap to me.

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

Passive income from 9.2% yield stock could cut pressure as costs spike

Passive income is one way to reduce the pressure on families, especially as a new study finds a third of…

Read more »

Rainbow foil balloon of the number two on pink background
Investing Articles

2 FTSE 100 dividend shares I’d buy to build £15k passive income

Building long-term passive income is an important part of my investment strategy. Here’s a couple of Footsie shares that I…

Read more »

Young mixed-race woman jumping for joy in a park with confetti falling around her
Investing Articles

Could this 2p UK penny stock be my biggest investing goldmine?

Picking up an unknown penny stock on the cheap -- if it has booming profits -- can give a huge…

Read more »