FTSE 100 cloud-based financial tools provider Sage Group (LSE: SGE) posted another set of broadly strong results on 15 May.
Its H1 2025 figures showed total revenue increase 9% year on year to £1.242m. Operating profit rose 10% to £1.203bn, with profit after tax rising 15% to £206m.
Earnings before interest, taxes, depreciation, and amortisation jumped 14% to £334m, while basic earnings per share increased 15% to 20.8p.
As a result, the firm boosted its dividend by 7% to 7.45p a share. It also extended its ongoing share buyback programme by up to £200m – these tend to be supportive of share price gains.
It forecasts total revenue growth for this year to be 9% or above.
The only real negative element in the numbers was an undershooting of analysts’ forecasts for North American growth. These were for 13%, while the accounting, HR and payroll solutions provider achieved 11%.
That said, consensus analysts’ projections are that its earnings will increase by 12.8% a year to the end of 2027. Growth in this area should lead eventually lead to a rising share price and dividends.
So what am I waiting for?
Just because I think a firm looks good does not mean I am willing to buy it at any price. This is the problem I have with Sage.
I lived through the now largely forgotten (but not by me) dotcom bubble of the late 1990s. Back then, many companies in the then-much-hyped emerging internet space saw their share prices driven up by the higher valuations of the sector’s leaders.
I think the same may apply to the prices of some companies in the now-much-hyped tech and artificial intelligence sector.
More specifically, Sage’s 34.5 price-to-earnings ratio is bottom of its international peer group, which averages 48.7. These firms are Oracle at 36.2, Salesforce at 43.7, SAP at 54.1, and Intuit at 60.8.
So, Sage looks undervalued compared to them on this measure.
The same is true of its 4.9 price-to-sales ratio – also bottom of the group – against its peers’ average of 8.7.
Crucially though, a discounted cash flow (DCF) analysis – completely independent of other firms’ valuations – paints a different picture. This pinpoints where any firm’s share price should be, based on future cash flow forecasts for the underlying business.
In Sage’s case, the DCF shows its shares are 38% overvalued at their current price of £12.52.
Therefore, their fair value should be £9.07.
My verdict
I do not doubt that Sage is a good firm and that it will keep growing. It may just be that its current share price reflects growth that has not happened yet. And the risk here is that this may undershoot these expectations, given the intense competition in the sector.
It may also occur from a continuation in the more volatile and uncertain macroeconomic environment highlighted by Sage in its H1 results. Its lower-than-expected growth in North America in H1 may be a sign of things to come in that regard.
In essence, given its substantial overvaluation in my view, I will not buy the stock.
