Business management solutions company Sage (LSE: SGE) delivered a share price decline of almost 15% in May.
That’s quite a move for such a big beast in the FTSE 100 index. So, what happened, and is the company worth considering as an investment now?
It looks like the half-year report released on 16 May did the damage. However, the company actually posted some good numbers for the six months to 31 March 2024.
Trading well
For example, underlying total revenue increased 10% year on year, and underlying earnings per share shot up by 23%.
The directors underlined the progress by bumping up the interim shareholder dividend by 6%.
Chief executive Steve Hare said Sage performed well in the first half of the year and delivered “broad-based” revenue growth and “significant” margin expansion.
Demand for the company’s solutions is “robust”, Hare insisted. Small and mid-sized businesses continue to trust Sage to automate their accounting, human resources, and payroll workflows.
Meanwhile, the company is focused on innovation to maintain the near-term competitive advantage of the business and its foundation for long-term success, Hare said.
In one tactic, the business is introducing new products and services using artificial intelligence (AI) to power enhanced productivity and insights. The move is “driving value” for both new and existing customers.
That all sounds positive, so why did the share price fall in May?
It’s subtle, but I reckon the market has re-evaluated the company based on the outlook statement.
The directors said they expect organic total revenue growth for the full year to September 2024 “to be broadly in line with the first half”.
A full-looking valuation
So, not ‘definitely’ in line. Not ‘simply’ in line, but ‘broadly’ in line. My assumption is that the market is reading the ‘broadly’ as meaning ‘almost’, or ‘not quite’, or ‘slightly below’.
Is that enough to cause the stock to decline? Probably. However, the move might have been exaggerated by the general easing back of the FTSE 100 index we saw during May.
Investors are used to strong performance from the business and the valuation has become quite rich because of that.
Even now, with the share price near 1,018p, the forward-looking earnings multiple for next year is almost 25.
That rating compares to City analysts’ estimates for growth in normalised earnings of about 14%. It’s also way higher the FTSE 100’s rating, also near 14.
I reckon, the market had been optimistic about Sage and wanted to hear the suggestion of a slight beat rather than a miss in estimates. Such are the dangers when valuations run hot for companies.
In fact, I think valuation risk is the biggest threat to shareholder returns here – even now, after May’s fall. Meanwhile, it’s possible for another general economic downturn to hurt the business, its customers, and shareholders at some point.
Nevertheless, Sage is a high-quality enterprise with robust earnings estimates and a long and steady record of rising dividends. Is it worth considering as an investment now? Absolutely!
However, I’d aim to be tactical with any share purchases. First, I’d engage in thorough and deeper research. Then I’d try to buy during periods of general market weakness and share price setbacks.
