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Why I’d Buy Zytronic PLC, But Would Sell Monitise Plc

The technology sector is a hugely exciting place to invest, with a number of new and potentially hugely profitable products continually being developed and released. The difficulty, though, is turning potential into reality, with a number of technology firms offering superb long term growth at one or another point in their lifetime, but failing to deliver real, hard profit at the bottom line.

Mobile Payments

A fine example of such a company is Monitise (LSE: MONI). It has developed applications for banking on tablets and mobile phones which are very easy to use and very popular among customers. In fact, Monitise has a number of blue-chip shareholders and customers, which indicates that it is doing all of the right things when it comes to its product offering.

The one thing it is not doing, though, is making money. In fact, Monitise is yet to make a profit. Under previous management it had stated that it expected to make an operating profit in 2016, but with a new CEO at the helm and a shift towards a subscription-based model (which, incidentally, seems to make a lot of sense), it seems unclear as to when (or if) Monitise will deliver on its promise.

Touch Screen

This situation contrasts markedly with Zytronic (LSE: ZYT). It manufactures touch screens for allsorts of products; from drinks machines, to ATMs. As such, it is not, strictly speaking, a technology company at all. Therefore, its bottom line is much healthier and more consistent than you would expect, with Zytronic having been profitable in every one of the last five years, with growth averaging 15% per annum during the period.

And, looking ahead, Zytronic is expected to be profitable in each of the next two years, with growth of 8% forecast in the current year, followed by a rise of 14% next year. Despite this, it trades on a price to earnings (P/E) ratio of just 14.1, which translates to a price to earnings growth (PEG) ratio of only 0.9. This indicates that its shares could continue the rise that has seen them soar by 33% since the start of 2014.

Looking Ahead

Clearly, Monitise may be able to turn its great product into a great business. However, it will be a difficult journey and, if met, could take a number of years to achieve. Furthermore, with the mobile payments space being so competitive, rivals could develop an improved product and cost Monitise its opportunity to bank a return while its apps are proving popular.

As such, Zytronic’s track record of growth, its forecasts and its valuation all hold tremendous appeal. And, while it is not really a technology stock, it is benefitting from the increased use of a relatively new technology in terms of the wider usage of touch screens in everyday life. As a result, it seems to be a better way to access a growth space, while maintaining a sound investment case via its upbeat financials.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Monitise. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.