Should you buy this former Neil Woodford favourite, down 10% today?

Are we seeing a buying opportunity with this quality enterprise?

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What I like most about IT infrastructure products and services provider Softcat (LSE: SCT) is its record of steady annual growth in revenue, normalised earnings, and operating cash flow.

Today’s full-year results revealed a bumper performance for the trading year to 31 July. Revenue came in almost 30% higher than the previous year, and adjusted diluted earnings per share moved up just shy of 38%.

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The directors pushed up the final dividend by more than 44%, and increased the special dividend by almost 12%, compared to last year’s payment. Overall, they raised the total dividend payment for the year by just under 21%, suggesting their confidence in the outlook.

Customers buying more

The company saw customer numbers rise by 4.7%, and they were buying more from the firm, too. Gross profit per customer rose almost 23% compared to last year, suggesting the firm has an attractive offering.

This success reflects in the cash inflow, and the closing cash balance for the year was £72.8m, up more than 18% compared to the year before. That’s even after paying dividends of £45.3m. The balance sheet is strong, with no borrowings at all. It’s clear that Softcat has been trading very well indeed.

Yet, as so often happens on results day, the shares dropped today and trade down around 10% as I’m writing. The company said in the report that it benefited from “exceptional market conditions in 2018.” So, the year is a difficult comparator to beat.

But the directors think that it can be done, saying: “Despite current political and economic uncertainty, and notwithstanding tough comparative figures, we are confident of achieving further profitable growth in 2019.”  Trading in the first 10 weeks of the new financial year, they said, has also been “encouraging.”

City analysts with an eye on Softcat predict growth in earnings for the current year in percentages measured in single figures, which is a little short of the double-digit annual increases we’ve become used to. But don’t forget what a stonking year the firm has just reported – it’s difficult to beat and even single figures would mean Softcat will have done even better than this stonking one. So ‘stonking-plus’ is on the cards.

Quality numbers

However, well-known fund manager Neil Woodford sold out of Softcat earlier in the year. Did he see today’s share-price weakness coming? I think that would be an unlikely reason for his sale, because he’s known for taking a long-term view with the companies he backs. It’s possible that he sold because he had to sell something.

The overall poor performance of his funds caused some investors to withdraw their capital and he would have had to raise cash to service that demand. Even at today’s share price close to 714p, the shares are up more than 140% since the beginning of 2017, so maybe he sold to take profits.

Or he could have sold on the grounds of valuation. The forward price-to-earnings ratio for the trading year to July 2019 is almost 25, which looks high in isolation. But the firm’s financial quality indicators are robust with, for example, the firm’s return-on-capital-employed figure running around 75%. I wouldn’t be in a hurry to sell this quality outfit and would look to buy shares during periods of market weakness.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

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 considered, so you should consider taking independent financial advice.

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