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Netcall plc & Norcros plc Are Flying High Today, But Should You Buy Or Sell Them?

All eyes are on Greece today, but I thought I’d flag a couple of stocks that are rising in early trade: Netcall (LSE: NET) and Norcros (LSE: NXR) — up 6% and 12%, respectively. 

If you have never heard of them, which is a distinct possibility, this would be a good opportunity to gauge the risks and possible rewards associated to both shares.

Netcall

Netcall announced today that it was in “advanced discussions regarding a possible acquisition by Eckoh” in a deal set to be financed by cash and stock. The acquirer offers secure payment solutions and is a good fit for Netcall, which is a process management software and services business. 

The terms are “1.25 Eckoh shares and 13 pence in cash for each Netcall share“, which would would imply a value of about 63.94p for each Netcall share, based on the closing mid-market share price per Eckoh share of 40.75p on 24 June 2015.

Judging by the reaction of both stocks on the market, investors seems to believe that the deal will be done on these terms — or, at least, at a very similar price. 

That said, given that “Eckoh reserves the right to introduce other forms of consideration and/or vary the proposed mix of consideration in any offer“, there remains room for a larger cash component. 

Eckoh has struggled to create value ever since mid-2014, but its trailing performance before then was truly impressive, and should it bulk up by acquiring Netcall, whose stock trades at a significant discount based on P/E multiples, it could be an equity investment worth keeping as part of a diversified portfolio, particularly if “significant synergies” — which will be targeted — are actually achieved.

Eckoh’s full-year results were also released today, and made for a good reading. 

Norcros

It announced today that it had completed the acquisition of Croydex Group Ltd for a “total consideration of £21.9m, of which £20.8m has been settled in cash and £1.1m consideration deferred for three years“.

The deal was funded entirely by debt through existing facilities, hence it’s accretive to earnings from day one. Norcros clearly boosts its offering with Croydex, given that the target manufactures and distributes high-quality bathroom furnishings and accessories both in the UK trade and retail segments. 

The group has found it more difficult to deliver value since early 2014, but I doubt it’ll stop with Croydex, as it needs growth to shore up its valuation. While it doesn’t look expensive, and it pays dividends, which are covered by earnings, I would not invest in it at present — but I’d keep an eye on future trading updates, paying particular attention to key cash flow metrics and trends for core operating margins. 

Cash flows and strong core margins back the investment case of much bigger companies that have been identified in our FREE Motley Fool research

Their growing earnings and high free cash flow yields promise market-beating returns, not only this year and next, but for a very long time. I am particularly attracted to a pharma play, which is trading low, too low based on its fair value. It's stock is flat for the year, but I'd bet it could rise at a fast pace in the second half of 2015. We also look at the prospects of a utility stock that offers a yield north of 4%, which combines with significant capital appreciation potential at this level  -- say 10% to the end of 2015. 

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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.