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Does Sepura Plc Offer More Value Than Genus plc & SDL plc After A 24% Rally?

Stocks with a “tech slant” always attract attention — take Sepura (LSE: SEPU), for instance.

It has risen a lot in the last two months of trade, and there’s reason to believe that its stock could continue to outperform Genus (LSE: GNS) and SDL (LSE: SDL) in weeks ahead.

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Here’s my quick take. 

Sepura (Market Cap €400m)

What you are buying: the company designs, develops and supplies digital radio systems, accessories and other related tools. It’s forecast to grow revenues at an astonishing compound annual growth rate (CAGR) of 19% into 2017, which will likely yield rapidly rising earnings and dividends. 

Bullish brokers forecast upside of up to about 30% from its current level of 160p a share. Earlier this week, Panmure’s price target rose to 190p a share from 170p, while at the end of May Liberum said that the business could be worth 202p a share.

I think analysts may well be right. 

Its balance sheet is strong, and based on forward earnings for cash flows and net earnings, its shares could indeed rise from its current level if it keeps up with its current strategy — on 26 May, it completed the acquisition of Teltronic, a €127.5m deal that was announced on 1 May, and contributed to a +24% performance since.

Genus (Market Cap £900m)

What you are buying: This is a biotech company with focus on animal genetics. I am not a big fan of biotech companies: they can deliver huge returns, but that comes at a high risk — Genus fell 30% in 1Q14, for instance, although it has recovered most of its value since. Genus could be added to your wish list now, however.

Its stock is up 13% this year and 40% since June 2014. Admittedly, it doesn’t trade in ‘bargain territory’, one of the reasons being that its forward earnings multiple stands at 28x, while its forward dividend yield is in the region of 1.3%. But if forecasts are correct, Genus may be able to grow earnings per share at 10% a year or more, which would render its stock cheaper, on a relative basis. 

Much of its fortunes hinge on cash returns, in my view; the good news is that Genus has room to boost returns by deploying more capital. 

SDL (Market Cap £330)

What you are buying: SDL offers information management solutions and software applications, a sector where consolidation is on the cards . SDL stock is essentially flat in 2015, and has been looking for direction for a couple of years now. It looks a tad expensive, based on key financial metrics, trading multiples, and in the light of a lowly forward dividend yield. 

Its balance is strong, but core operating margins are not incredibly enticing. I think management would do well to announce a more aggressive corporate strategy with regard to capital allocation — its core free cash flow yield is low, but there’s room for action, if it exploits its balance sheet. 

Until then, investors would do well to give it a pass. 

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